BP (BP), a major oil company, has seen weak business conditions this year. The stock is down 8% year-to-date due to lower crude oil and natural gas prices. A weaker refining environment also suppressed the company’s downstream earnings. Let’s see what lies in store for BP in 2020.
As BP is an integrated oil and gas company, its outlook is dependent on upstream and downstream conditions. While upstream earnings are mainly affected by crude oil prices, downstream earnings are affected by refining margins. In 2020, the company’s earnings growth will be based on both variables—oil prices and refining margins.
BP’s upstream outlook
BP’s upstream earnings are dependent on oil and gas production volumes and energy prices. BP has a series of projects under development, which could boost the company’s production in the year. The company expects to add 900 Mboepd (thousand barrels of oil equivalent per day) of hydrocarbon production until 2021.
The rise in output will be from projects that have been in operation since 2016. In the first nine months of 2019, BP produced 2.6 Mboepd, which reflected 4.2% YoY growth. The company may continue its growth spree next year as well.
Further, oil prices could recover in 2020. Though oil market fundamentals look weak, the limited US-China trade deal and production cuts by OPEC and allies should support oil prices.
Uncertainty regarding the US-China trade deal has affected oil demand growth estimates due to the expectation of slowing global economic growth, which could affect oil demand. However, now, as both countries have reached Phase 1 of the deal, demand concerns seem to be easing.
The improving environment was echoed by OPEC and IEA (International Energy Agency) recently, according to the Wall Street Journal. OPEC said, “Global trade slowdown has likely bottomed out.” The IEA also stated, “The deterioration in trade and industrial activity seen in recent months may have come to an end at the start of 4Q19.”
OPEC and its allies’ decision to deepen production cuts is aimed at removing the extra barrels of oil from the market. This move could provide further support to oil prices, which means the oil price environment could improve next year.
Thus, higher hydrocarbon production coupled with better oil prices could support BP’s upstream earnings in 2020.
Downstream conditions could improve due to IMO 2020
The refining environment is rapidly changing with the upcoming IMO (International Maritime Organization) 2020 regulation. As per the new regulation, shippers will have to use low-sulfur fuels starting on January 1, 2020. This means the demand for these fuels will increase. Refiners that have the capability to produce low-sulfur fuels using sour crude oil will be the largest beneficiaries. Others will require sweet crude oil to produce low-sulfur oil.
Oil spreads and refining cracks have already started widening in anticipation of IMO 2020. As refiners have started producing more low-sulfur fuel, the supply of gasoline and other refined products has been interrupted, increasing the refining cracks.
Further, due to the increase in demand for sweet crude oil, the sweet-sour spread has started rising. The robust cracks and spread should likely continue in the first half of the next year until the dust surrounding IMO 2020 settles.
Besides, higher cracks and spreads should boost refining margins. BP could benefit from a better margin in 2020.
BP’s earnings estimate for 2020
Wall Street analysts expect BP’s earnings to rise by 15% in 2020. This projection looks very possible considering improving oil prices, better hydrocarbon output, and strengthening refining conditions.
To learn more about BP’s financial position, read BP versus Chevron: Who Has More Financial Power?