Here’s why BP’s downstream segment could improve
On the back of gasoline supply glut, refining margins have declined consistently hampering performance of BP plc (ADR) (NYSE:BP). Even integrated oil majors like BP have faced headwinds and their downstream segment’s performance has been impacted.
For example in BP’s last quarterly performance, the profitability from downstream segment declined by around 17% as compared to 1Q, and was around 21% lower on Year-over-Year (YoY) basis. The higher utilization rates of refineries have created a supply glut, which continues to weigh on refining margins, as reflected in the company’s downstream performance in the image below:
The refining margins declined after 3Q last year, until of recent past when the margins have shown some signs of improvement. The gradual increase in demand for gasoline in US is one of the reason for improving margins, coupled with lower utilization rates of refineries as they go towards a maintenance at end of summer season.
As a result, the gasoline inventories are slowly being cleared up, but still are higher than the inventory levels which have persisted in past. Moreover, we continue to remain bullish for BP’s downstream segment as we expect the gasoline demand to increase in future.
Even Energy Information Administration (EIA) in its short term energy outlook released on August 9 noted that it expects an increase in gasoline’s demand by around 150,000 barrels per day by the year end. This, if increased would result in around 9.3 million barrels per day, and would at record levels.
The major reason behind surge in US gasoline demand is the surge in highway travel in the SU region, which is expected to soar higher by 2.3%, which is on back of lower level of gasoline prices coupled with better labor market situation.
The US Refinery realization rates are already on a decline, and has been lower than as compared to last year’s rate, and is pretty much close to five year average utilization rate.
The efficiency of BP’s downstream segment would serve as another value addition for company’s overall performance. For example, company’s advantaged crude oil processing has improved by around 25%, coupled with a modest 4% increase in its refining utilization.
As a result, company’s margins are improving. More importantly, on back of better processing of feedstock, the pre-tax earnings are also on consistent rise, as shown in image below:
Hence, the efficiency of company’s downstream segment coupled with better outlook for the segment might turn the table for company in future.