Big Oil's Q2 Outlook: Downstream Gains and Upstream Pains

Major integrated oil companies like ExxonMobil, BP, and Shell are facing a mixed second quarter, with significant upstream earnings pressure due to falling oil and gas prices, exemplified by ExxonMobil's projected $1.9 billion decline. However, strong downstream refining margins are providing a crucial offset, with BP anticipating refining profits to surge to $21.10 per barrel and Shell seeing margins rise to $8.90 per barrel. This robust refining performance is mitigating the impact of weaker commodity prices, offering a less pessimistic Q2 outlook for the sector as steady global demand and improving LNG exports could support firmer prices in late 2025.

Analysis

The upcoming Q2 earnings for major integrated oil companies are characterized by a significant divergence between upstream and downstream operations. Upstream segments are facing substantial headwinds from declining commodity prices, with ExxonMobil forecasting an earnings drop of up to $1.9 billion due to oil prices falling to an average of $63.54 in April and natural gas hitting earnings by as much as $700 million. Similarly, BP expects an $800 million hit to its drilling profits. In contrast, the downstream refining business is providing a critical buffer. BP's refining margins are projected to surge from $15.20 to $21.10 per barrel, potentially adding up to $500 million to profits. Shell also expects its refining margins to rise to $8.90 per barrel from $6.20 in Q1. However, company-specific challenges exist; Shell faces production declines, weaker LNG trading, and a loss in its chemicals division, while Exxon's potential $100-$500 million refining gain may only partially offset its larger upstream losses. BP stands out with higher-than-anticipated production and expected debt reduction, signaling stronger operational execution amidst the challenging price environment. The overall outlook suggests that while headline earnings will be weak, with EPS estimates down 27-40% year-over-year, the resilience of the integrated model is being tested, with a potential for firmer prices not expected until the second half of 2025.

Key Decisions for Investors

• Investors should assess integrated oil majors on the strength of their downstream segments, as robust refining margins are the primary factor mitigating weak upstream results in the current environment.
• Differentiate between companies based on operational execution beyond commodity prices; for instance, BP's combination of higher production guidance and debt reduction may present a more resilient profile than Shell, which faces multiple headwinds including production declines and chemical division losses.
• Given that consensus EPS estimates are down significantly year-over-year, focus on management commentary regarding cost controls, the sustainability of refining margins, and any updated outlook on commodity prices for the second half of the year.
• Consider the integrated model's hedging value, but recognize that the degree of offset varies greatly, requiring a close look at segment-level results rather than treating the sector monolithically.