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Which Way Will Oil Prices Sway BP’s Upstream Earnings in 4Q17?

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Jan. 31 2018, Updated 7:36 a.m. ET

BP’s upstream earnings

In the previous part of this series, we saw BP’s (BP) 4Q17 earnings estimates. Now let’s look at how BP’s upstream earnings are likely to shape up in 4Q17.

BP’s upstream earnings rely on crude oil prices and hydrocarbon volumes.

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Crude oil price trends in 4Q17

Oil prices influence BP’s upstream earnings considerably. A dollar-per-barrel increase in Brent price grows BP’s pre-tax replacement cost operating profit by $340 million annually.

In 4Q17, Brent prices have risen quarter-over-quarter as well as year-over-year. Brent prices have surged to an average of $61 per barrel in 4Q17, which is higher than the average of $52 per barrel in 3Q17. Also, Brent prices in 4Q17 are quite high compared to the average of $49 per barrel in 4Q16. Similarly, for WTI, prices have risen YoY as well as QoQ in 4Q17.

Volume expectation

Per BP’s expectation, its hydrocarbon production is expected to rise in 4Q17 over 3Q17 because of new field start-ups and existing field ramp-ups, coupled with recovery from the turnaround and maintenance activities.

BP produced 2.5 MM boed (million barrels of oil equivalent per day) in 3Q17. Chevron (CVX) produced 2.7 MM boed in 3Q17. However, ExxonMobil (XOM) and Royal Dutch Shell (RDS.A) produced higher volumes standings at 3.9 MM boed and 3.7 MM boed, respectively, in 3Q17.

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So, per BP’s Management guidance, its production in 4Q17 should stand higher than the production in 3Q17 of 2.5 MM boed. As BP’s production is expected to be more than 2.5 MM boed in 4Q17, it should also stand higher than its 4Q16 production of 2.2 MM boed. So we can conclude that BP’s production is expected to rise in 4Q17 over 4Q16.

In short…

BP’s upstream earnings could rise year-over-year in 4Q17 because hydrocarbon production is expected to rise, and crude oil realizations are likely to be higher in 4Q17 than in 4Q16. Plus, quarter-over-quarter, BP’s upstream earnings are likely to rise due to higher production and a probable rise in crude oil realizations.

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