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BP: Time For A Turnaround

Summary

BP’s weak downstream performance last year and continued softness in refining margins in the beginning of 2016 have weighed on the stock, but things are about to get better.

The EIA has raised its gasoline consumption forecast for 2016 thrice already from 10,000 bpd to 90,000 bpd, which is not surprising as consumption is stronger than last year already,

Gasoline prices usually peak in the summer months as the driving season gets underway, indicating that BP will see a bump in refining margins in the current quarter.

Increasing demand for gasoline in China and India due to higher car sales will also act as a growth driver for BP’s refining margins.

Among the big oil companies, BP (NYSE:BP) has turned in the worst performance on the stock market this year. In fact, BP shares are down close to 6% in 2016 while the likes of Chevron (NYSE:CVX), Exxon Mobil (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) are up in single digits. This indicates that BP has been unable to take advantage of the recovery in oil prices over the past two and a half months, and this could be attributed to weakness in the company's downstream segment.

What gives?

Now, it was the downstream segment that had helped BP offset the weakness in the upstream due to strong refining margins, but as the year came to an end, the strength in the refining business tailed off. As shown in the chart given below, BP's downstream performance took a nosedive as the year ended:

Source: BP

As we can see above, BP's refining margins fell steeply in the last quarter of 2015, leading to a sharp drop in the replacement cost of profit before interest and taxes. This drop in refining margins was a result of oversupply in the gasoline market, which created huge pressure on BP as for a $1 drop in refining margins, the company's pre-tax adjusted earnings...


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