BP Earnings Preview: High Oil Prices To Override Lower Prodution

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British oil major BP (NYSE:BP) will come out with its Q1 earnings on May 1. We expect the company to post a year-on-year increase in earnings backed by high oil prices, however lower output could impact its results. Rival Exxon Mobil (NYSE:XOM) announced that its quarterly earnings saw a drop in Q1 because of its exposure to low gas prices in North America. BP, which has focused on high-returns, liquids and international natural gas opportunities, should see a limited impact on its overall earnings. The company officials had earlier said that BP would look to increase volumes after they bottomed out in the last quarter of 2011.

We have a $59.51 price  estimate for BP, which is at a 35% premium to its current price estimate.

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Production volumes key

Oil prices remained high in the first quarter of 2012, held up by rising tensions with Iran and a revival in the U.S. economy. Upstream earnings should also hold up with the high oil prices overriding low natural gas prices in North America. In addition, we will closely watch BP’s production volumes to judge whether the company’s plan to revive operations are beginning to show results. The company’s output has seen consecutive declines since the Gulf of Mexico disaster in 2010. The drilling moratorium in the Gulf has had a huge impact on BP’s exploration and production plans overall. Although the moratorium has been lifted, the company’s production volumes in the region have still not showed a recovery.

BP has said that its upcoming projects in Angola, the North Sea and new drilling in the Gulf should help the company boost volumes. Volumes from its Russian subsidiary TNK-BP have also been strong over the past few quarters.

Downstream

Downstream earnings should show an improvement in Q1 because of higher volumes as well as better refining margins in the last quarter. BP has been going ahead with a program to sell its low margin refining assets. Profits from asset sales could also boost the company’s downstream earnings in the period.

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