For Oil, It's Let the Good Times Roll

GOOD MORNING. stocks in Asia closed lower today; U.S. futures are pointing to a mixed open.

The days of windfall earnings may be long gone for oil companies. But thanks to cost cutting and a rebounding global economy, they’re still pumping out profits.

That’s the message that BP (BP) sent today with an earnings report that beat forecasts by a wide margin. Europe’s second largest oil producer said third quarter profits fell 34% to $5.34 billion from $8.05 billion a year earlier. But excluding one-time items and inventory changes, the company earned $4.67 billion, beating forecasts of a $3.25 billion gain. BP also hiked cost reduction targets, now expecting to cut costs by $4 billion this year, twice the target of $2 billion it set at the start of 2009. "These results demonstrate real operational momentum across the company. We continue to transform our cost base," CEO Tony Hayward said in a statement. And analysts liked what they saw. “There’s little to criticize in it,” says Gordon Gray, an oil industry analyst with Collins Stewart in London.

The challenge for BP and other oil companies, of course, will be to keep the momentum going. BP beat estimates so widely in good measure due to cost cuts and a lower tax rate. Analysts will now be hiking their forecasts, however, and it may be tougher for BP to beat by such a wide margin again. The company doesn’t issue earnings guidance for upstream operations, but it said that it expects refining margins to “remain weak” due to high inventory levels and low global utilization rates. It also expects petrochemicals margins to be “under pressure” in the fourth quarter as competitors ramp up new refineries.

Still, even if demand for refinery products doesn’t improve, BP’s profits should continue to rise thanks to a turnaround program that’s continuing to lift the bottom line, says analyst Richard Griffith of Evolution Securities in London. The company may not have another three months as strong as the third quarter—something Griffith calls a “rare occurrence.” But BP seems to be a bit with traders: its shares hit 16-month highs in European trading today.

IN OTHER NEWS:

Investors are expecting strong results from Visa (V) when the company reports its earnings for the fiscal fourth quarter after the market closes today. Analysts anticipate earnings of 72 cents per share, up from 58 cents a share in the same quarter a year ago, and up sequentially from 64 cents in the quarter ending in June. The company is expected to report revenue of $1.87 billion, representing 4.1% growth over the year-ago results.

Visa and MasterCard (MA) have already released data showing that the number of transactions processed has been increasing over the course of this quarter, so investors may focus on other issues, says Roger Smith, an analyst at Fox-Pitt Kelton Cochran Caronia Waller. “What I think might be telling is if [Visa gives] us some kind of read into what might be changing in spending habits,” Smith says.

Also on investors’ radar: the proposed regulation of interchange fees, or the payments retailers pay to banks when a customer uses a credit card. Though new regulations wouldn’t directly impact Visa’s revenues, investors are overly worried how banks will respond, says Greg Smith, a research analyst with Duncan Williams, Inc. Concerns range from banks reducing the number of cards they offer, to cutting credit lines, to pressuring Visa and MasterCard to charge lower fees.

On the upside, Visa should reap the benefits in the third quarter of a move it completed in July – bumping up the fees it charges middlemen who process card transactions. MasterCard’s revenue and earnings beat expectations after a similar maneuver in April, Smith points out. Investors should also get a useful view of overall consumer spending trends, including the relative strength of credit versus debit cards, from Visa’s earnings conference call at 5 p.m.