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BP's Earnings Got a Much Needed Boost From Refining

By Tyler Crowe - Oct 27, 2015 at 10:59AM

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Thanks to downstream earnings more than doubling compared to the same quarter last year, BP was able to post better than expected earnings per share in the third quarter.

Image Source: BP via

I can't imagine that anyone was expecting BP (BP 3.18%) to have a stellar quarter with oil and gas prices in the dumps. But on Tuesday, the company announced better than expected earnings thanks to a well timed boost from its downstream business segments of refining and retail sales. That boost from refining couldn't have come at a better time, though, because earnings from production and its equity interest in Rosneft are following CEO Bob Dudley's earlier prediction that we are in for "lower for longer" oil prices.

By the numbers
BP's normalized third quarter earnings per share on its American Depository Shares came in at $0.60. It's a notable decline from the $0.90 it generated the same quarter last year, but that was expected as oil prices have declined. However, BP soundly beat consensus analyst expectations compiled by S&P Capital IQ of $0.36 per share.

Based on the breakdown of earnings by business segment, it becomes apparently clear that its downstream segment made up for weaknesses elsewhere.

Source: BP third quarter earnings release, author's chart

The Highlights
Even though upstream profits were 77% less than this time last year, we did see a little bit of an improvement from last quarter. That is actually an impressive feat because the average realized price for oil and gas was lower than in the second quarter.

Price realizations Q3 2014 Q2 2015 Q3 2015
Crude oil ($per barrel) 91.42 56.69 44.01
Natural Gas ($per thousand cubic feet)  5.40 3.80 3.49
Average price ($per barrel of oil equivalent) 61.61 40.04 33.25

Source: BP earnings release

Two reasons that it was able to improve upstream profits despite the miserable price realizations is that total production increased by 4.4% year over year. Furthermore, all of that new production came from oil outside the U.S. and Europe. Total Rest of World oil production increased by 23% giving its entire liquids production platform an 11% boost year over year.

Another aspect of BP's earnings that deserve a small clap is the company's downstream earnings. Part of those results are from a fantastic refining environment today. The European Refining Margin Indicator for the quarter was $58.10 per ton, the highest it has been for more than a decade. You have to give the company credit, though, as it has divested itself of some of its smaller, lower performing refineries and has focused on a portfolio of large, complex refineries that can outperform any market environment.

The Lowlights
Despite these elements, you still have to remember that the returns for its upstream business are absolutely miserable right now. Its Lower 48 oil and gas production was "spun-off" internally to allow it to be more nimble in the shale drilling space, but both it and the company's production from the rest of the U.S. continue to lose money at today's prices.

As part of the earnings release, CEO Bob Dudley said that the company isn't anticipating oil prices to be above $60 in 2016. If this is true, then the company will need to continually rely on its downstream business segment to pick up the slack from the production side unless BP can make even deeper cuts to its production costs.

What a Fool Believes
BP's earnings this past quarter prove once again the strength of the vertically integrated oil and gas business model. If it were to rely on just its production profits, the company wouldn't come close to funding its capital exploration budget or meet its dividend payments to shareholders. Management has been able to reduce operational costs by about $3 billion so far this year and divest itself of some less profitable assets. If Dudley is correct and $60 per barrel oil is here for a while longer, then BP's results will likely look pretty similar to what they have these past two quarters. Not exactly the most encouraging sign for investors.

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