BP’s changing segmental dynamics
Volatile oil prices have changed BP’s (BP) segment dynamics. The upstream segment, which accounted for 24% of the URC (underlying replacement cost) EBIT (earnings before interest and tax) in 1Q15, posted a loss in 1Q16.
BP’s downstream URC EBIT fell by 16% over 1Q15 to $1.8 billion in 1Q16. The Rosneft segment’s URC EBIT also fell. While overall URC EBIT slumped from $2.5 billion in 1Q15 to $0.99 billion in 1Q16, the downstream and Rosneft segments saved the day for BP.
BP’s peers have also seen their segment dynamics change. The upstream segment of Total (TOT), which contributed 48% of total adjusted earnings in 1Q15, contributed 26% in 1Q16. Suncor Energy’s (SU) and Exxon Mobil’s (XOM) upstream segments posted losses in 1Q16.
The Vanguard Energy ETF (VDE) has ~39% exposure to integrated energy sector stocks, including XOM and CVX.
BP’s 2Q16 segment-wise outlook
In 2Q16, BP (BP) is likely to witness improved upstream earnings as well as higher downstream earnings compared to 1Q16. Brent crude oil prices, which averaged $34 per barrel in 1Q16, rose to $46 per barrel in 2Q16. This points to a likely rise in BP’s upstream earnings.
The downstream segment’s earnings are also likely to be better. This is due to global refining marker margins (or RMM), which are refining margin indicators of areas where BP operates, widening in 2Q16 compared to 1Q16.
Global RMM rose to $13.80 per barrel in 2Q16 compared to $10.50 per barrel in 1Q16. All the zones have shown improvement in margins except for Australia, which showed a decline in margins in 2Q16 compared to 1Q16.
However, Brent crude oil prices and global RMM stood at $62 and $19.40 per barrel in 2Q15. This implies a year-over-year decline in upstream and downstream earnings in 2Q16.