BP’s downstream earnings
In the previous part, we discussed BP’s (BP) upstream earnings outlook, which hinted at a YoY (year-over-year) rise in 1Q18. Now, let’s look at how BP’s downstream earnings could shape up in the next quarter.
BP’s downstream earnings depend on the refining margin, which is influenced by regional refining cracks. Regional refining cracks where BP’s refineries are located include the USNW (US North West), USMW (US Midwest), the NWE (Northwest Europe), the Mediterranean, and Australia.
BP calculates the RMM (refining marker margin). According to BP, 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.”
RMM trend in 1Q18
In 1Q18, BP’s RMM has declined YoY as well as quarter-over-quarter. According to BP, a shift of $1 per barrel in its RMM moves its pretax replacement cost operating profit by $500 million annually.
BP’s RMM has fallen from $12.9 per barrel in 1Q17 to $11.6 per barrel in 1Q18. BP’s RMM has declined from $12.2 per barrel in 4Q17.
The YoY fall in BP’s RMM is due to an across-the-board fall in its regional refining cracks except for USMW. The USMW region has observed a rise in its cracks by 13% YoY to $13.2 per barrel in 1Q18 quarter-to-date. The highest fall was seen by USNW and Australia, which have fallen 10% YoY each to $14.3 per barrel and $11.6 per barrel, respectively, in 1Q18. In absolute terms, the USNW crack is the highest among the regional cracks being considered here.
Assuming that the refining throughput is constant, BP’s refining earnings could fall YoY in 1Q18, as indicated by the lower RMM.