BP Faces $3B Hit in 2Q24 Amid Refining Challenges & Low Demand

BP plc BP is bracing for a substantial financial setback as it prepares to report its second-quarter 2024 results. The company anticipates a $3-billion (£2.3 billion) hit due to reduced demand for fuels, which has affected its refining business.

BP has warned investors of significantly lower realized refining margins, which could slash its earnings by $500-$700 million for the quarter. This decline is attributed to weak diesel prices and narrower North American heavy crude oil differentials, which have particularly impacted BP's large refinery in Whiting, IN. Despite a high level of refinery maintenance in the quarter, the resumption of operations at the Whiting refinery is expected to provide an earnings uplift of $500 million.

Adding to its financial challenges, BP plans to take a $2-billion write-down as it scales back its refining operations at the Gelsenkirchen refinery in Germany. The company aims to reduce operations by a third starting next year in response to weaker demand. This strategic move underscores BP's efforts to streamline its operations amid a challenging market environment.

Despite these setbacks, investors expect BP's second-quarter underlying replacement cost profit, which the company defines as net income, to reach $3.13 billion, according to LSEG data. Earlier this year, BP implemented a hiring freeze and paused renewable energy projects as part of CEO Murray Auchincloss' plan to enhance returns and cut costs by $2 billion.

BP's upstream production in the second quarter is projected to remain broadly flat compared with the prior three months, with oil and gas production standing at 2.38 million barrels of oil equivalent per day (Boe/d) in the first quarter. This stability follows the start-up of fields in Azerbaijan and the United States. Additionally, higher realized oil prices in the second quarter are expected to boost profits by $100-$300 million.

BP is not alone in facing challenges. The British oil and gas multinational Shell plc SHEL is also expected to take an impairment charge of up to $2 billion in its upcoming results. This follows Shell's decision to halt work on Europe's largest sustainable aviation fuel project in Rotterdam and sell off a refinery in Singapore. Shell plans to shift its focus from low-carbon investments to expanding its gas business, with plans to develop a gas field east of Trinidad and Tobago.

As BP prepares to release its second-quarter results, the company is navigating a complex landscape of lower refining margins, strategic operational adjustments and efforts to enhance profitability. While the anticipated financial hit is significant, BP's measures to cut costs and adjust its operational focus highlight its strategic response to current market conditions.

Zacks Rank & Key Picks

BP currently carries a Zack Rank #3 (Hold).

Investors interested in the energy sector may look at some better-ranked stocks like SM Energy Company SM and The Williams Companies, Inc. WMB, each currently sporting a Zacks Rank #1 (Strong Buy).

SM Energy is set to expand its oil-centered operations in the coming years, with an increasing focus on crude oil, especially in the Permian Basin and Eagle Ford regions. The company's attractive oil and gas investments should create long-term value for shareholders.

The Zacks Consensus Estimate for SM's 2024 and 2025 EPS is pegged at $7.15 and $8.79, respectively. The company has a Zacks Style Score of A for Value and Momentum. It has witnessed upward earnings estimate revisions for 2024 and 2025 in the past seven days.

Williams Companies is a premier energy infrastructure provider in North America. The company's core operations include finding, producing, gathering, processing and transportation of natural gas and natural gas liquids.WMB is paying its shareholders an attractive dividend yielding around 5%. 

The Zacks Consensus Estimate for WMB's 2024 and 2025 EPS is pegged at $1.79 and $2.03, respectively. The company has a Zacks Style Score of B for Growth and A for Momentum. It has witnessed upward earnings estimate revisions for 2024 and 2025 in the past 30 days.

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