By Ron Bousso and Shadia Nasralla
LONDON (Reuters) - BP's profits thundered to a five-year high, boosted by stronger oil prices with production set to rise further thanks to the $10.5 billion acquisition of BHP Billiton's U.S. shale business this week.
The results further underscore a striking shift in BP over the past year as it shakes off the legacy of the deadly 2010 Deepwater Horizon disaster with new projects and the BHP deal, its largest acquisition in 20 years.
In a further sign of confidence, BP said it now expected to fully fund the acquisition from available cash without resorting to a rights issue as planned. It still plans to sell $5-$6 billion of assets to reduce debt.
"We're a bit cautious to use the words ‘blow out’ when talking about BP, but today's results are just that," Bernstein analyst Oswald Clint said in a note.
BP shares were up 3.4 percent by 0914 GMT, compared with a 1 percent rise in the broader European oil and gas sector.
The rise in oil prices over the past year to their highest since late 2014 has boosted revenue for oil companies such as BP. Coupled with deep cost cuts and stricter spending since the 2014 downturn, the sector has enjoyed rapid growth in profits.
BP's third-quarter underlying replacement cost profit, the company's definition of net income, rose to $3.8 billion, far exceeding forecasts of $2.85 billion based on a company-provided survey of analysts.
That compared with a profit of $1.86 billion a year earlierand $2.8 billion in the second quarter of 2018.
The profit increase came as production in the first nine months of the year rose thanks to new fields and high oil and gas field reliability.
Underlying pretax profit for BP's upstream business more than doubled to around $4 billion in the quarter compared with a year ago.
"We're seeing a backdrop of a strong and well-performing business," Chief Financial Officer Brian Gilvary told Reuters.
"We're confident within the financial frame we can close this transaction with all cash," Gilvary said.
Oil and gas production for the first nine months of the year increased to 2.5 million barrels of oil equivalent per day (boed) and was set to rise further with the expected completion of the BHP deal on Oct. 31.
BP launched nine major oil and gas fields over the past year, including in Azerbaijan, Oman, Egypt and Angola that will help boost production by 900,000 barrels of oil equivalent per day (boed) by 2021. Most of the production will be gas.
The BHP deal is set to initially add over 100,000 boed in production before disposals, which will mostly include predominantly onshore U.S. shale gas producing assets that BP already owns, Gilvary said.
Gearing, the ratio between debt and BP's market value, declined to 27.5 percent at the end of the quarter from 27.8 percent at the end of June. Net debt was $39.2 billion at the end of September.
Gilvary said that gearing could temporarily rise next year above the 30 percent limit the company had set, depending on oil prices, as it pays for the BHP deal.
In the fourth quarter, BP expects lower refining margins and more refinery turnarounds mainly at its Whiting site in the United States.
BP expects its capex in 2018 to be around $15 billion.
BP's operating cash flow, excluding payments for the Deepwater Horizon spill, was $6.6 billion, the same as last year.
(Reporting by Ron Bousso; Editing by Keith Weir and Louise Heavens)