BP Earnings Preview: Crude Output, Refinery Margins in Spotlight

January 25th, 2012 by Trefis Team
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British oil major BP (NYSE:BP) will be releasing its Q4 earnings on February 7 after a quarter dominated by litigation issues related to the U.S. Gulf of Mexico spill. While the case is scheduled to begin toward the end of next month, BP’s earnings performance will mainly be influenced by its upstream production levels and its refinery margins. Oil prices remained high throughout last quarter, guaranteeing the company strong upstream results. However, downstream returns are negatively influenced by high crude oil prices. Oil majors such as Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) will release their earnings over the next few days.

We have a $55 price estimate for BP, which is at a 20% premium to its current stock price.

Click here for our full analysis of BP.

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Upstream Production

Hit by the deepwater moratorium in the U.S. and loss of output because of its divestment program, BP’s production levels have seen a significant drop over the past year. The company is expecting a turnaround in its fortunes with the U.S. government allowing it to participate in the latest round of auctions for lease sales in the Gulf, where it bid successfully for a few blocks. High oil prices are enticing players like BP to redouble efforts in upstream exploration in deepwater and in geographically challenging locations such as Alaska.

Declining output from existing fields is also driving BP to develop new fields. Over the last year, the company announced massive projects in the U.K. North Sea and bought stake in the KG Basin gas blocks in India. Output from deepwater fields in Angola will also boost its production levels in the future. (See: BP Earnings Preview: Good Riddance to Q3)

Downstream Margins Hit

High crude prices have an adverse impact on refining margins. In its interim earnings report, competitor Chevron indicated that refining margins for Q4 would be hit because of lower margins as well as decline in refining volumes. Few refineries in the U.S. have been shut in the last few months because of high input prices. [1] BP has been actively looking to reduce its assets in the downstream business over the last year to focus on high returns upstream business. However, it still has a significant presence in the refining and marketing businesses. We expect a fall in sequential profits for the company’s downstream business in the last quarter.

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Notes:
  1. High Oil Prices Taking Toll on Refiners, The Street [↩]