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Is BP Ready for Lower Oil Prices?

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Part 5
Is BP Ready for Lower Oil Prices? PART 5 OF 17

Behind BP’s 3Q17 Performance Outlook

BP’s segments

BP’s (BP) rising Upstream segment earnings led to a surge in its overall earnings in 2Q17, and so even while its Downstream earnings fell, the former contributed a significant portion of BP’s total earnings.

By comparison, Chevron’s (CVX) downstream earnings fell 6% YoY to ~$1.2 million in 2Q17 due to a drop in international downstream earnings, which were partly offset by a rise in its domestic downstream earnings.

Behind BP’s 3Q17 Performance Outlook

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But ExxonMobil’s (XOM) downstream earnings grew due to higher margins and favorable volume and mix effects. XOM’s downstream earnings rose by 68% over 2Q16 to nearly $1.4 billion in 2Q17. Royal Dutch Shell’s (RDS.A) downstream earnings rose 39% over 2Q16 to just over $2.5 billion in 2Q17 due to the robust chemical and refining environment.

BP’s Upstream segment contributed 33% to its URC EBIT, while its Downstream segment contributed 65%, and the Rosneft segment contributed ~13%.

BP’s 3Q17 earnings outlook

In 3Q17, BP (BP) could witness better downstream earnings, and its Upstream segment earnings could improve due to higher oil prices. Brent crude oil prices have risen $3 per barrel over 3Q16 to $49 in 3Q17 QTD (quarter-to-date). An increase of $1 per barrel in Brent prices increases BP’s pre-tax replacement cost-operating profit by ~$340 million annually.

BP’s Downstream segment earnings are also likely to rise, given global RMMs (refining marker margins), which serve as refining margin indicators of areas where BP operates. These RMMs have risen $3.3 per barrel YoY (year-over-year) to $14.8 per barrel in 3Q17 QTD.

But on a quarter-over-quarter basis, the average Brent price has declined, though global RMMs have risen. Brent fell $0.8 per barrel from 2Q17 levels to $49 per barrel in 3Q17 QTD. Global RMMs rose $1.0 per barrel from 2Q17 to $14.8 per barrel in 3Q17 QTD. According to BP, a $1-per-barrel change in its RMM changes its pre-tax replacement cost-operating profit by $500 million annually.

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