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Did BP’s Refining Marker Margin Sink in 3Q16?

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BP’s refining capacity

Before we analyze BP’s (BP) refining marker margin, let’s take a quick look at its refining capacity. BP has 1.8 MMbpd (million barrels per day) of refining capacity spread worldwide. In the US, BP has ~0.74 MMbpd of refining capacities located in the Northwest and East of the Rockies.

Around 0.85 MMbpd—another significant portion of refining capacity—is located in Europe and 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 marker margin

The income from refining operations is primarily dependent on refining margins and crack spreads. Regional refining margins in BP’s refineries include the USMW (US Midwest), the USNWC (US North West Coast), the NWE (North West Europe), and the Med (Mediterranean).

According to BP, “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 3Q16, BP’s Downstream segment earnings fell 38% compared to 3Q15 due to narrowing refining margins. The USMW margin fell steeply by $10.00 per barrel over 3Q15 to $14.60 per barrel in 3Q16. Also, USNWC margins fell by $9.00 per barrel to $18.10 per barrel.

Respectively, the NWE and the Med margins fell 47% and 46% over 3Q15 to $8.90 per barrel and $7.70 per barrel in 3Q16. BP’s average RMM fell by $8.00 per barrel over 3Q15 to $11.60 per barrel in 3Q16.

The iShares Russell 1000 Value ETF (IWD) has ~13% exposure to energy sector stocks.

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