BP’s first-quarter review
BP (BP) plans to post its second-quarter earnings results on July 30. Before we proceed with BP’s second-quarter earnings estimates, let’s look at how the company performed compared to forecasts in the first quarter.
BP’s first-quarter revenue stood at $66.3 billion, exceeding Wall Street analysts’ estimate by ~9%. Its first-quarter adjusted earnings per American depositary share stood at $0.70, ~4% higher than analysts’ estimate of $0.67. However, BP’s adjusted EPS fell 10% YoY (year-over-year) in the quarter.
BP’s adjusted earnings fell 8.8% YoY to $2.4 billion in the first quarter due to falls in its adjusted upstream and downstream earnings partly offset by an increase in its adjusted Rosneft earnings YoY in the quarter. BP’s Upstream segment’s adjusted EBIT fell 7% YoY to $2.9 billion in the first quarter of 2019 due to weaker realizations partly offset by better volumes. BP’s hydrocarbon production rose 2.0% YoY to 2.66 million barrels of oil equivalent per day in the first quarter. BP’s Downstream segment’s earnings fell 5% YoY to $1.7 billion in the first quarter due to a lower refining margin resulting from lower North American oil spreads. BP’s Rosneft segment’s adjusted EBIT rose 130% YoY to $0.6 billion in the quarter. To learn more, read BP’s Q1 Upstream and Downstream Earnings Fell.
BP’s second-quarter estimates
As per analysts’ estimates, BP is expected to post EPS of $0.86 in the second quarter, 1% higher than its adjusted EPS in the second quarter of 2018 and 23% higher than its adjusted EPS in the first quarter. BP’s revenue is expected to be ~$71.5 billion in the second quarter, ~5% lower than its revenue in the second quarter of 2018.
BP’s peers are expected to put up mixed performances YoY in the second quarter. Chevron (CVX), Suncor Energy (SU), and Royal Dutch Shell (RDS.A) are expected to post YoY rises of 6%, 22%, and 12%, respectively, in their EPS in the quarter. However, ExxonMobil (XOM) and Total (TOT) are expected to see 7% YoY and 2% YoY falls in their earnings in the quarter.
In the second quarter, average crude oil prices were lower YoY, which could result in lower upstream realizations for BP. BP’s downstream earnings could, however, rise, as indicated by stronger global RMMs (refining marker margin) in the second quarter over the second quarter of 2018.
BP’s upstream earnings outlook
Now let’s review BP’s expected upstream earnings in the second quarter. Because upstream earnings are reliant on crude oil prices and hydrocarbon volumes, let’s evaluate these trends in the second quarter.
Oil prices affect BP’s upstream earnings. A dollar-per-barrel rise in Brent’s price grows BP’s pretax replacement cost operating profit by $340 million annually.
Oil prices fell in the second quarter. Also, the average oil prices in the quarter were lower YoY. The average Brent price fell from $75 per barrel in the second quarter of 2018 to $69 per barrel in the second quarter of 2019.
According to BP’s guidance, its hydrocarbon production is expected to stay flat quarter-over-quarter in the second quarter because of the ramp-ups of significant projects partly offset by maintenance activities in high-margin areas.
BP produced 2.66 MMboepd (million barrels of oil equivalent per day) of hydrocarbons in the first quarter. According to BP’s guidance, its production in the second quarter should be ~2.66 MMboepd, higher than its production of 2.45 MMboepd in the second quarter of 2018. Thus, BP’s output could rise YoY in the second quarter.
Overall, in the second quarter, BP’s upstream earnings could fall YoY led by lower oil prices partially offset by higher volumes.
Will BP’s downstream earnings rise in the second quarter?
BP’s downstream earnings are affected by its refining margin, which is driven by regional refining cracks.
BP calculates its RMM as the average of these regional cracks weighted for its regional refining capacity. According to BP, a dollar-per-barrel change in its RMM changes its pretax replacement cost operating profit by $500 million annually.
BP’s RMM rose YoY in the second quarter. Its RMM rose from $14.9 per barrel in the second quarter of 2018 to $15.2 per barrel in the second quarter of 2019 due to a rise in the regional refining cracks in two of its five operating areas. The US Midwest saw the highest increase in its crack. The region’s crack rose 17% YoY to $21.6 per barrel in the second quarter of 2019. Also, the crack in the US Northwest rose marginally by 2% YoY in the quarter. The US region refined another 42% of BP’s throughput in the previous quarter.
However, the Northwest European crack dropped 2% YoY to $11.9 per barrel. This fall could affect the company’s refining margin in Europe, which refined ~44% of its total oil throughput in the first quarter. The Mediterranean and Australian refining cracks also fell 16% and 22% YoY, respectively, in the second quarter.
Overall, the rise in the cracks in BP’s main operating areas and the increase in its RMM indicate a higher refining margin for the company YoY in the second quarter. This higher margin could boost the company’s downstream earnings in the quarter.
Analysts’ ratings for BP
Now let’s discuss analysts’ ratings for BP ahead of its earnings release. The stock has been covered by a total of 11 Wall Street analysts. Of this total, five analysts (or 45%) have given it “buy” or “strong buy” ratings, another five have given it “hold” ratings, and one has given it a “sell” rating. BP’s mean target price of $50 per share indicates a potential upside of 22% from its current level.
Chevron (CVX), Shell (RDS.A), and ExxonMobil (XOM) have been tagged as “buys” by 74%, 91%, and 27% of analysts, respectively. Other integrated players Total (TOT), Suncor Energy (SU), and YPF (YPF) have been rated as “buys” by 100%, 92%, and 85% of analysts, respectively.
BP has a robust upstream portfolio with a strong project pipeline. However, BP has a weak debt and cash flow position.
In the second quarter, BP approved Phase 2 of its upstream Thunder Horse South expansion project. The project is expected to add 50 Mbpd (thousand barrels per day) by 2021. BP also approved the $6 billion offshore Azerbaijan Azeri Central East project, which could deliver 100 Mbpd by 2023. These projects strengthened BP’s upstream portfolio.
Since 2016, BP has begun 22 upstream projects. In 2019, the company plans to start another two. In 2020 and 2021, BP plans to launch 11 new projects. Overall, these projects are cumulatively supposed to add net new production of ~900,000 barrels of oil equivalent by 2021.
Among its peers, BP has the largest percentage of debt in its capital structure. In the first quarter, BP’s total debt-to-capital ratio stood at 43%. ExxonMobil and Chevron had ratios of 17% and 18%, respectively, in the quarter. Suncor Energy’s, Total’s, and Royal Dutch Shell’s debt ratios stood at 30%, 33%, and 32%, respectively.
BP’s net debt-to-adjusted EBITDA ratio rose from 1.4x in the first quarter of 2018 to 1.5x in the first quarter of 2019. This ratio was again the highest among its peers. ExxonMobil’s, Chevron’s, and Total’s net debt-to-adjusted EBITDA ratios stood at 1.0x, 0.7x, and 0.9x, respectively, in the first quarter. Suncor’s and Shell’s ratios stood at 1.4x and 1.2x, respectively.
BP’s net debt-to-adjusted EBITDA and total debt-to-capital ratios stood the highest among its peers—not a comfortable scenario.
In the first quarter, BP’s cash flow from operations of $5.3 billion fell $1.6 billion short of covering its combined capex and dividend outflows. Thus, BP’s cash flow shortfall stood at 31% (shown as a percentage of its earnings capacity—that is, its cash flow from operations). Again, this placed it the highest among its peers—not a favorable scenario. ExxonMobil’s, Chevron’s, Suncor’s, and Shell’s shortfalls were 4%, 3%, 1%, and 4%, respectively. Total’s shortfall stood at 25% in the first quarter.
Thus, BP has mixed ratings from Wall Street analyst due to its strong upstream portfolio offset by its high debt and tighter cash flows.