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Why BP’s Refining Margin Indicators Plunged in 1Q16

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BP’s refining capacity

Before we analyze BP’s (BP) refining margin indicators, let’s quickly look at its refining capacity. BP has 1.8 MMbpd (million barrels per day) worth of refining capacity worldwide. In the United States, BP has around 0.74 MMbpd worth of refining capacity located in the US Northwest and east of the Rockies.

Around 0.85 MMbpd, another large portion of its refining capacity, is located in Europe, spread over Germany, the Netherlands, and Spain. BP also has a combined capacity of 0.26 MMbpd in Australia, New Zealand, and South Africa.

BP’s peers ExxonMobil (XOM), Chevron (CVX), and Royal Dutch Shell (RDS.A) have refining capacities of 5.1 MMbpd, 1.8 MMbpd, and 3.1 MMbpd, respectively.

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BP’s refining margin indicators

BP’s income from its refining operations is primarily dependent on refining margins and crack spreads. BP closely tracks refining margin market indicators in the US Midwest, the US Northwest Coast, Northwest Europe, and the Mediterranean.

The company also calculates its refining marker margin. According to BP, the “refining marker margin, or RMM, is the average of regional indicator margins weighted for BP’s crude refining capacity in each region. Each regional marker margin is based on product yields and a marker crude oil deemed appropriate for the region. The regional indicator margins may not be representative of the margins achieved by BP in any period because of BP’s particular refinery configurations and crude and product slate.”

In 1Q16, BP’s downstream segment earnings fell by 16% compared to 1Q15 due to narrowing refining margins. The US Midwest’s margin fell steeply by $7 per barrel over 1Q15 to $9.8 per barrel in 1Q16.

The US Northwest Coast’s margin fell by $6 per barrel to $15.6 per barrel. Plus, Northwest Europe’s and the Mediterranean’s margins fell by 31% and 21%, respectively, over 1Q15 to $9.2 per barrel and $9.3 per barrel, respectively, in 1Q16. BP’s average RMM fell by $5 per barrel over 1Q15 to $10.5 per barrel in 1Q16.

If you’re looking for exposure to refining and marketing sector stocks, you can consider the Vanguard Energy ETF (VDE). The ETF has ~10% exposure to refining sector stocks.

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