Oil companies like BP Plc. (NYSE ADR: BP), Exxon Mobil Corp. (NYSE: XOM), Royal Dutch Shell Plc. (NYSE ADR: RDS.A), Total SA (NYSE ADR: TOT), and Chevron Corp. (NYSE: CVX) all followed a similar pattern. Each posted lower earnings and higher downstream profits that beat Wall Street expectations.
Downstream operations include everything that takes place after the production phase. These can range from refining and distribution to sales of the final product.
The refining segments of these oil and gas companies have picked up the slack lately. Refining units drag down earnings during high oil price periods. That's because high prices squeeze margins on refined products like gasoline, whose prices are lowered by excess supply.
Now, downstream operations have improved as they enjoy strong demand and low oil prices.
"For years refining has been the ugly duckling in big oil companies' portfolios," The Wall Street Journal reported, "but the sharp drop in crude prices has boosted the sector's profitability."
Here's how the Big Oil companies performed last quarter, and what to expect going forward...
How Q1 Earnings Affected the Top Big Oil Stocks
BP was the first of the Big Oil stocks to release Q1 numbers.
It posted an overall profit of $2.1 billion, marking a 40% decline from the $3.5 billion reported last year.
The firm's downstream sector, including refining and chemicals production, raked in $2.1 billion. That's more than double the company's downstream profit from Q1 2014.
The company acknowledged in its report how increased downstream activity effectively counters lower prices.
"We are resetting and rebalancing BP to meet the challenges of a possible period of sustained lower prices," BP Chief Executive Robert Dudley said in a statement. "Our results today reflect both this weaker environment and the actions we are taking in response."
After releasing earnings on April 28, BP shares shot up about 1%. The stock has gained 0.4% since then. Yahoo! Finance's one-year target estimate for the BP stock price is $42.80. That's 1% less than last Friday's closing price of $43.23.
Total's downstream operations saw even larger growth - take a look...
The company's cash from the downstream sector tripled from Q1 2014. Chief Executive Patrick Pouyanné attributed these strong profits to Total's integrated model - a company structure engaged in all aspects of the downstream, including exploring, producing, refining, and distributing oil.
One of the last Big Oil stocks to report earnings was Exxon.
The U.S. oil behemoth posted $4.9 billion in earnings, a 46.2% decline from the year-ago quarter. Exxon reported adjusted EPS of $1.17, down 44% from $2.10 in Q1 2014.
But Exxon didn't break Big Oil's Q1 downstream track record. Profits from the company's global refineries more than doubled to $1.67 billion. The largest gains came from non-U.S. facilities, which saw a sixfold increase in profits.
XOM stock fell 8.1% in the first quarter and 13.9% since prices started crashing last June. However, shares are up 0.9% since earnings were released on April 30.
After a series of imbalanced earnings reports, the big question is...
Where Do Big Oil Stocks Go from Here?
According to Money Morning Global Energy Strategist Dr. Kent Moors, Big Oil stocks will gain momentum this year as the mergers and acquisitions (M&A) cycle heats up.
Although they're expected to hit $60 to $73 by mid-summer, oil prices are still low right now. That means the energy environment is poised for M&A activity.
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In fact, the largest merger in more than a decade happened last month...
On April 8, Shell acquired BG Group Plc. (OTCMKTS ADR: BRGYY) for $70 billion. The deal makes Shell the largest independent producer of liquefied natural gas (LNG) in the world. RDS.A shares have leaped 6.6% since news of the deal broke.
"The Shell-BG [transaction] will be a huge deal, dwarfing anything else out there," Moors explained. "This is also the first clear megamerger option crossing the oil-gas division. We will see more of these as the new energy balance among a widening number of energy sources kicks in."
Other Big Oil companies are also poised to take over smaller firms. Exxon has done some strategic buying during past low price periods. It snagged Mobil Corp. for $82 billion in 1999 when oil traded around $20 a barrel.
Now, rumors have been circulating that Exxon will acquire BP in the near future. Wolfe Research analyst Paul Sankey said BP "is the obvious fit" for Exxon's next target. Exxon's head of investor relations Jeff Woodbury stated that the company will "pursue only those acquisitions that we think have ultimate strategic value and are accretive to our longer-term returns."
How to Profit from Oil Prices Right Now... Spotting healthy oil stocks to buy is tricky for many investors because of the low-price environment. But there are still plenty of profitable gems in the oil sector. Here's a roundup of the best oil stocks to buy now as prices stabilize in 2015...
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- The Wall Street Journal: 5 Things to Know About BP's First-Quarter Earnings