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

The upcoming earnings reports for big oil and energy companies will tell a story of two different worlds. On the one hand, we will likely see lower profits from simply drilling for oil and gas (or the ‘upstream’ side of the business). On the other hand, businesses that refine crude oil into products like gasoline and make chemicals (known as ‘downstream’) might show surprising strength. Major players like ExxonMobil XOM, Shell SHEL and BP BP have already given us hints. They are seeing profits squeezed from falling oil and gas prices. So, as these companies share their results in the coming weeks, everyone will be watching their ability to control costs, how well their refineries performed, and if demand for energy is truly recovering.

ExxonMobil: Leaning on Refineries to Counter Lower Prices

ExxonMobil, the world's largest integrated energy company, expects its second-quarter earnings to take a hit because of lower oil and gas prices. The American supermajor recently warned that its upstream earnings could fall by as much as $1.9 billion from the first-quarter level. This big drop is mostly due to oil prices bringing in $1.2 billion less, and natural gas prices adding up to a $700 million hit. Data from the U.S. Energy Information Administration (“EIA”) confirms this trend: WTI crude oil averaged just $63.54 in April and $68.17 in June, down from $75.74 in January.

But it's not all bad news for ExxonMobil. It might actually see a modest boost from its refining and chemical businesses, with refining profits potentially adding between $100 million and $500 million. However, planned maintenance work and other timing issues could lessen those gains. With the Zacks Consensus Estimate for ExxonMobil’s EPS down nearly 33% from last year to $1.44, the pressure is squarely on its non-drilling segments to stabilize the overall results.

BP: Production Up, But Prices Down

London-based BP is heading into its second-quarter earnings with a mixed bag of expectations. On the bright side, the Zacks Rank #3 (Hold) company expects to pump out more oil and gas than initially predicted, and even more than it did in the first quarter. This boost is largely thanks to higher output from their U.S. shale operations. However, BP has also warned that lower crude oil prices will hit its drilling profits hard, by about $800 million. Weaker natural gas prices are also expected to weigh on earnings, though to a lesser extent.

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Where BP might really shine is in its refining business. It anticipates refining profits jumping from $15.20 per barrel in the first quarter to $21.10 in the second. This could potentially boost its "customers and products" segment by $300 million to $500 million. Plus, BP expects its total debt to dip below the first-quarter level of $27 billion, indicating sound financial management. With the consensus EPS mark at 60 cents (down 40% from last year), any gains from refining will be vital in cushioning the blow from weaker oil and gas prices.

Shell: Navigating Headwinds With Refining Strength

Europe’s largest oil company, Shell, is also facing a challenging quarter, with several parts of its business dealing with headwinds. The company expects second-quarter average production for its Integrated Gas division to be 900,000–940,000 barrels of oil equivalent per day compared with 927,000 achieved in the January-March period. LNG output is now expected to be between 6.4 million and 6.8 million tons, and gas trading results are likely to be weaker than in the first quarter. On the traditional drilling side, production is expected to decline to 1.66 million–1.76 million barrels of oil equivalent per day, due to both scheduled maintenance and the sale of its Nigerian SPDC assets. 

Still, Shell's refining margins look strong, rising from $6.20 per barrel in the first quarter to $8.90 per barrel in the second. This is supported by better utilization of its refineries. However, the company’s chemicals business is expected to report a loss due to unplanned shutdowns at its Monaca plant. Shell’s renewables and energy solutions segment’s bottom line will likely be between $400 million loss and $200 million profit. The Zacks Consensus Estimate for Shell's EPS is pegged at $1.44, down 27% from last year, as the company relies on its marketing and refining arms to offset broader weak

The Outlook: Silver Linings for Energy Investors

As is evident, the refining side of the energy business is showing remarkable strength. Companies like ExxonMobil, BP and Shell are seeing much better profits from turning crude oil into fuels and other products. That’s why, despite the pressure on oil and gas drilling operations due to lower prices, the second-quarter outlook for energy investors isn't entirely gloomy. 

Looking ahead, global demand for oil remains steady, with summer travel and increased electricity use driving higher consumption. Demand for natural gas in the United States is also growing stronger, thanks to mid-summer heat and improving flows of LNG exports. As companies maintain discipline in their supply and excess inventories slowly return to normal levels, the stage could be set for firmer prices in the second half of 2025.

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This article originally published on Zacks Investment Research (zacks.com).

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