BP, Total weather oil price storm
STRONG DOWNSTREAM FUNDAMENTALS EXPECTED TO LAST INTO SECOND QUARTER A slump in oil prices has seen refineries process much cheaper crude and generate higher profits.
Global energy majors post higher than expected profits; oil firms cancel rig contracts to cut costs
BP and Total reported higher than expected profits yesterday thanks to steep increases in profits from refining, showing the resilience of global oil firms in the face of slumping oil prices.
Large oil companies have closed down dozens of refineries in the past few years due to over-capacity and because refining, or downstream in industry jargon, has been long seen as a drag on earnings compared to more profitable oil and gas production.
But a slump in oil prices, benchmark Brent prices almost halved to $55 (Dh202) a barrel in the first quarter of 2015 from a year ago, meant refineries could process much cheaper crude and generate higher profits on fuels such as diesel or gasoline.
As a result, BP’s underlying pre-tax replacement cost profit from downstream businesses in the first quarter of 2015 more than doubled to $2.2 billion.
At the same time, pre-tax profits from oil and gas production, or upstream, collapsed to $600 million from $4.4 billion a year earlier.
At Europe’s largest refiner Total, adjusted net operating income from refining and chemicals more than tripled from the first quarter last year to $1.1 billion, almost matching contributions from upstream of $1.36 billion, down 56 per cent.
“Majors with high downstream exposure such as Royal Dutch Shell, Total or Exxon Mobil should benefit from the strong global refining environment, which BP expects to last into the second quarter,” analysts from Edison Investment Research said in a note.
Weaker margins
Weaker refining margins so far in the second quarter as a result of higher crude oil prices mean next quarter’s results might not benefit so much from downstream, analysts said. BP’s overall profit fell 20 per cent from last year to $2.58 billion and Total’s was down 22 per cent at $2.6 billion, but in both cases their strong refining performances meant the results beat analysts’ expectations.
Shares of BP and Total rose 1.4 and 2 per cent respectively, both outperforming the broader European oil and gas sector’s index.
Despite the collapse in upstream earnings, analysts pointed out that both BP and Total had hefty increases in production after years of unimpressive growth, meaning earnings should recover quickly as soon as oil prices rise.
Total said its oil and gas output of 2.4 million barrels per day of oil equivalent (boed) during the first quarter was up 10 per cent year-on-year thanks to new projects in Norway, Nigeria and the North Sea, as well as a new concession in the UAE.