What’s the Outlook for BP’s Downstream Earnings in Q4 2018?

In the last article, we reviewed BP’s (BP) upstream earnings outlook. Now let’s look at BP’s downstream earnings outlook for the fourth quarter.

BP’s downstream earnings are dependent on its refining margin, which is influenced by regional refining cracks.

BP calculates its RMM (refining marker margin), which is an average of its regional cracks, weighted for its regional refining capacity. According to BP, a dollar-per-barrel shift in its RMM would shift its pretax replacement cost operating profit by $500 million annually.

BP’s RMM has fallen YoY (year-over-year) in the fourth quarter so far.

BP’s RMM has fallen from $14.4 per barrel in the fourth quarter of 2017 to $12.3 per barrel in the fourth quarter of 2018 due to an across-the-board fall in its regional refining cracks. So far, the US Midwest (or USMW) has seen the highest fall in the crack. The USMW crack has fallen 21% YoY to $16.5 per barrel in the fourth quarter. Also, the US Northwest crack has fallen 12% YoY to $13.8 per barrel. The fall could affect the company’s refining margin in the United States, which refined ~41% of the company’s total crude oil throughput in the third quarter.

The European region refined another 41% of BP’s throughput. So far, the Northwest Europe crack has fallen 12% YoY. The Mediterranean and Australian refining cracks have also fallen YoY in the quarter.

Thus, the fall in the cracks in BP’s major operating areas and the decline in its RMM imply a lower YoY refining margin for the company in the fourth quarter.

Given the information listed above, it’s implied that BP’s refining margins could fall in the fourth quarter. BP also expects higher downstream turnaround activities (especially in the Whiting refinery in the United States), which could affect its throughput.

Overall, BP’s refining earnings could fall YoY in the fourth quarter due to the potential of weaker margins and throughput.