Exxon Mobil Is a Strong BuyXOM) operates in three major segments: Upstream, Downstream and Chemical. The focus of this article will be on the downstream segment.
The downstream segment of Exxon Mobil manufactures and sells different petroleum products such as gasoline, jet fuel, heating oil, diesel, and propane. For this purpose, the company has refining facilities in 14 countries. The operations that are essential for the downstream segment are transportation, refining and marketing of the products.
The products of this segment cover a range of requirements including consumer, commercial, industrial, aviation, marine lubricants, and basestocks and specialty products.
Last reported performance:
The earnings from the downstream segment in the first quarter were $ 906 million which was down $ 761 million from the first quarter of 2015 and down $ 445 million from the fourth quarter of 2015. The primary reason for the poor show was a decrease in margins which resulted in a decline of $ 860 million in the segment’s earnings. Margins in the current quarter have shrunk even more due to a sharp recovery in crude oil prices compared to the previous quarter as well as the previous year.
As the oil prices have recovered of late, the global oil majors have started to feel the pressure on their downstream margins. The costs of their unhedged raw material supplies have significantly increased over the last quarter. So the margin growth in the downstream segment which was offsetting the losses at the upstream is tending to reverse now. And the oil prices have not recovered enough to cause the upstream earnings to turn green again.
However, global oil majors are anticipating downstream margins to shrink further as a result of rising crude oil prices. The future of upstream producers is undoubtedly looking bright going forward. But for downstream players in particular, it is time for another bout of asset divestment. This time the assets are going to be the refineries and other downstream production units. And these acts have already started in the industry.
For instance, players like Chevron and Royal Dutch Shell Plc. are putting their lower margin assets that include small refineries on auction. The profit margins from refining operations have fallen from the highs seen in 2015. The reason is that the price of refinery products, especially gasoline, has not kept pace with the rise in crude prices. It may seem like early times for selling off the refineries at the moment. But the oil majors are doing it sooner rather than later because the present margins are still high and this would result in a higher valuation of those assets. That will get them a reasonable amount of cash flow and will save their balance sheets from being hit. Otherwise they might suffer similar losses on asset sales as most of them did when they had to do the distress sale of their upstream assets forced by the crude oil rout.
Downstream margins of Exxon Mobil and other major players have been declining through the recent times as crude oil kept crawling northward. So downstream is no more able to balance the negative earnings of the upstream segment. This is causing major players involved in the downstream business to sell off their low margin assets well in time so that their balance sheet doesn’t suffer. Therefore, the outlook at the downstream has gone bleak recently and a series of innovations is again called for by one and all to see through this.
Published on Jun 30, 2016By Subhen Mittra