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BP’s Earnings: Will Upstream, Downstream Slump in Q3?

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Integrated oil and gas major BP (BP) is expected to post its third-quarter results next week. Given a challenging third quarter, will BP’s earnings put on a good show? Let’s review its third-quarter guidance, starting with its Upstream segment.

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Impact of oil prices on BP’s earnings

Oil prices fell 7.5% in the third quarter. Average oil prices were also down YoY (year-over-year) in the period. A $1-per-barrel decline in Brent’s price decreases BP’s pretax replacement cost operating profit by $340 million annually. Brent’s average price stood at $62 per barrel in the third quarter, lower than $75 per barrel in the third quarter of 2018. Brent’s third-quarter average was also lower than its second-quarter average of $69 per barrel.

BP’s upstream earnings

According to BP’s guidance, its hydrocarbon production is expected to fall sequentially in the third quarter because of high maintenance activities in Angola, the North Sea, and the US Gulf of Mexico. Production will also take a hit in the US Gulf of Mexico due to Hurricane Barry.

BP produced 2.62 MMboepd (million barrels of oil equivalent per day) of hydrocarbons in the second quarter. As per its guidance, its third-quarter production should be lower than 2.62 MMboepd. In the third quarter of 2018, the company produced 2.46 MMboepd.

So, in the third quarter of 2019, if the fall in BP’s output is more than 0.16 MMboepd sequentially, it will also result in a fall in YoY production, and vice versa.

In the third quarter, BP’s upstream earnings could fall YoY led by lower oil prices and possibly lower volumes.

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BP’s RMM in the third quarter

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

BP calculates its RMM (refining marker margin) as an average of regional cracks weighted for its regional refining capacity. According to BP, a $1-per-barrel shift in its RMM shifts its pretax replacement cost operating profit by $500 million annually.

At $14.7 per barrel, BP’s RMM has been flat YoY in the third quarter due to a fall in regional refining cracks in the US Midwest, partly offset by rises in cracks in other regions.

In the third quarter, the US Midwest crack fell 12% YoY to $16.8 per barrel. However, the US North West crack surged 21% YoY to $18.7 per barrel. This change could affect the company’s refining margin in the US, which refined around 42% of the company’s throughput in the second quarter.

The European region refined another 45% of BP’s throughput. The Northwest Europe crack rose 3% YoY. The Mediterranean and Australian refining cracks also rose 1% YoY and 5% YoY, respectively, in the quarter.

Downstream earnings in the third quarter

According to BP’s guidance, it expects a lower level of turnaround activity in the third quarter. Its downstream earnings could stay flat or see marginal upside or downside movement based on a possibly flat refining margin (as indicated by RMM) and potentially higher throughput.

BP’s earnings compared to its peers’

Wall Street analysts expect BP’s earnings to fall 48% YoY in the third quarter mainly due to the lower oil price estimate for the quarter.

BP’s peers ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and Chevron (CVX) could be affected by lower oil prices. It’s no surprise that analysts expect their earnings to fall in the quarter. ExxonMobil’s, Shell’s, and Chevron’s earnings could drop about 54%, 27%, and 31%, respectively, YoY in the third quarter.

To learn more, read XOM, CVX, RDS, BP: Will Energy Earnings Fall in Q3?

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