Downstream segment’s earnings
In the previous part, we saw that BP’s (BP) Upstream earnings outlook hinted at a year-over-year rise in 3Q17. In this article, let’s see how BP’s Downstream earnings could shape up in the next quarter.
BP’s Downstream earnings are dependent on refining margins, which are influenced by regional refining cracks. Regional refining cracks where BP’s refineries are located include the USNW (US Northwest), USMW (US Midwest), the NWE (Northwest Europe), the Med (Mediterranean), and Australia.
BP calculates its RMM (or refining marker margin) as “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.”
RMM trend in 3Q17
BP’s RMM has risen quarter-over-quarter and year-over-year in 3Q17. According to BP, a $1 per barrel shift in its RMM shifts its pretax replacement cost operating profit by $500 million annually.
BP’s RMM has risen from $13.80 per barrel in 2Q17 to $16.40 per barrel in 3Q17. BP’s 3Q17 RMM is higher than its 3Q16 RMM of $11.50 per barrel.
The rise in BP’s RMM is due to an across-the-board rise in its regional refining cracks. The Med region has observed the highest rise in its cracks, with a 57% YoY increase to $12.10 per barrel in 3Q17 quarter-to-date.
The lowest rise was seen by the USNW region, which has risen 28% YoY to $23.10 per barrel. In absolute terms, USNW crack stands the highest among the regional cracks under consideration. Assuming refining throughput to be constant, BP’s refining earnings could rise year-over-year and quarter-over-quarter, as indicated by its higher RMM.