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BP Q4 Earnings: Key Factors to Know Ahead of the Release

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BP plc (BP - Free Report) is expected to report fourth-quarter 2018 earnings on Feb 5.

The British oil giant’s earnings were well ahead of expectations in the preceding three-month period. The bottom line recorded a massive year-over-year improvement on the back of higher price realizations and project ramp ups. Coming to earnings surprise history, the company missed earnings estimates in just one of the trailing four quarters, with average positive earnings surprise of 11.8%. This is depicted in the graph below.

BP p.l.c. Price and EPS Surprise

BP p.l.c. Price and EPS Surprise | BP p.l.c. Quote

Importantly, the Zacks Consensus Estimate for BP’s fourth-quarter earnings is pegged at 78 cents per share, which marks an increase of 21.9% from the year-ago figure.

Let’s delve deeper to find out how things are shaping up for this announcement.

Factors at Play

Upstream

In the fourth quarter, the West Texas Intermediate (WTI) crude plunged from a multi-year high of $76.40 a barrel in early October to below $45 in late December, per the U.S. Energy Information Administration (EIA). Delicate demand outlook on fears of global economic slowdown kept the energy market under pressure. Even the enforcement of sanctions against Iran by the United States last November could not keep oil price from plunging. This was because Washington provided sanction waivers to several big oil-importing countries to continue shipping Iranian crude till mid-2019.

Despite the plunge, the average WTI oil prices in October and November 2018 were recorded at $70.75 and $56.96 per barrel, higher than $51.58 and $56.64 in the respective months of 2017, per EIA. However, the average crude price in December 2018 declined on a year-over-year basis. Although plummeting crude prices during the quarter should have hurt upstream activities, a year-over-year uptick in prices in the initial two months might have helped the companies with significant upstream operations like BP.

Moreover, per EIA, the average natural gas prices for the months of October, November and December 2018 were reported at $3.28 per Million Btu, $4.09 per Million Btu and $4.04 per Million Btu, higher than $2.88, $3.01 and $2.82 recorded in the respective months of 2017. Hence, the commodity pricing environment was favorable for BP.

Taking into consideration that the upstream segment of the company will surely benefit from year-over-year higher commodity price realizations, it expects production levels in the to-be-reported quarter to rise sequentially from 2,460 thousand barrels of oil equivalent per day. The rise will be supported by the acquisition of BHP assets in the U.S. lower 48.

Downstream

In the downstream segment, the company expects high level of turnaround activities at its Whiting refinery in the United States, which may impact throughput levels. Moreover, the company anticipates lower industry refining margins. Notably, BP expects the Global Refining Marker margin for the fourth quarter to be $11 per barrel, lower than third-quarter 2018’s $14.7 and second quarter’s $14.9.

Considering an expected improvement in the upstream business and deterioration in the downstream operations, predicting an earnings beat is not easy.

Earnings Whispers

Our proven model does not conclusively show that BP will beat estimates in the to-be-reported quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to be able to beat the consensus estimate. That is not the case here as you will see below. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP, which represents the difference between the Most Accurate Estimate and the Zacks Consensus Estimate, is 0.00%. This is because the Most Accurate Estimate and the Zacks Consensus Estimate are both pegged at 78 cents.

Zacks Rank: BP’s Zacks Rank #4 (Sell) further decreases the predictive power of ESP, making us less confident of an earnings surprise call.

As it is, we caution against stocks with a Zacks Ranks #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Though an earnings beat looks uncertain for BP, here are a few firms from the energy space that you may want to consider on the basis of our model. These have the right combination of elements to post an earnings beat in the quarter to be reported.

Tulsa, OK-based The Williams Companies, Inc. (WMB - Free Report) has a Zacks Rank #3 and an Earnings ESP of +10.08%. The company is slated to report fourth-quarter earnings on Feb 13. You can see the complete list of today’s Zacks #1 Rank stocks here.

Houston, TX-based Rowan Companies plc holds a Zacks Rank #3 and has an Earnings ESP of +0.24%. The company is scheduled to report fourth-quarter earnings on Feb 27.

Houston, TX-based Phillips 66 (PSX - Free Report) carries a Zacks Rank #3 and has an Earnings ESP of +7.66%. The company is anticipated to report quarterly results on Feb 8.

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