Excluding the exceptional items, which had been flagged to the market earlier this month, net profits rose 46 percent to a record $4.338 billion. This compares with the average forecast of $4.18 billion given in a Reuters poll of 13 analysts.

Profits surged mainly due to good results from BP's exploration and production operations on the back of oil prices that soared more than 60 percent this year, but refining and chemicals margins were also strong.

"These are a good set of numbers," said Peter Hitchens, an industry analyst at brokers Cheuvreux.

However, BP's shares eased 1.4 percent to 530 pence compared with a 0.7 percent fall in the sector. Dealers said the extra cash going to capital expenditure next year meant there would be less available for buybacks.

"Previously BP had guided to falling spending as a result of having spent a lot of money on new oil fields. Therefore people had expected there might be more money available for share buybacks," said J.J. Traynor, an oil analyst at Deutsche Bank.

Nonetheless BP said its buyback programme would continue.

BP's fall was also in line with a drop in the oil price toward $54 this week, from a record high of $55.67 on Monday. Analysts noted that BP's stock was more highly correlated with the oil price than other major oil stocks.

HIGHER CAPEX

BP predicted capital expenditure, excluding acquisitions, of slightly above $14 billion for this year and around $14 billion for 2005. The 2005 figure was revised up by around $1 billion to compensate for a weak dollar and higher costs.

Inflation in the prices of capital goods used is running at 10 percent, BP said, and as some costs are not in dollars, the weakness in this currency is likely to boost outlays even more.

Efficiency gains are expected to offset some of the rises, but some investors are concerned that the return on capital expenditure on exploration and production (E&P) may be starting to trend downward.

Strong profit growth in exploration and production underpinned the results, and this was largely due to high oil prices. Chief Executive John Browne said he expected oil prices to remain above $30 a barrel in the medium term but added BP would continue to use a $20 oil price to assess new projects.

Production rose 11 percent on the year, but this was driven by growth in output at BP's operations in Russia where high taxes eat into margins. Damage caused by Hurricane Ivan in the Gulf of Mexico, a high-margin area of activity, weighed on output and profits.

E&P boss Tony Hayward told reporters he expected production outside Russia to start to show a rebound in the fourth quarter.

Meanwhile, oil refining margins were markedly higher than the level a year ago and beat some predictions because of upgrading in capacity and supply optimisation.

Petrochemical profits, excluding exceptionals, rose sharply. Analysts said the company was enjoying a resurgence of pricing power in this business on the back of strong demand.

However, Browne said he was not looking to use BP's heady profits to make big acquisitions.

"Now is not a good time to be in the business of buying things as the premium is pretty high," he said.

BP also announced a 9 percent increase in the third-quarter dividend to 7.1 U.S. cents per share, as analysts had expected.