Friday, July 4, 2008

Upstream versus Downstream Earnings at Two Major Integrated Oil Companies

One argument often made against investing in major integrated oil and gas companies is that rising crude prices hurt their "downstream" refining businesses. What percentage of their earnings come from their downstream businesses versus their upstream and chemicals businesses? Here are the data for Exxon Mobil and Chevron, from their most recent annual reports:


- Total earnings from upstream operations in 2007: $14.82 billion
- Total earnings from downstream operations in 2007: $3.5 billion
- Total earnings from chemicals and other businesses: $370 million
- Percentage of earnings from downstream operations in 2007: 18.73%

Exxon Mobil

- Total earnings from upstream operations in 2007: $26.5 billion
- Total earnings from downstream operations in 2007: $9.57 billion
- Total earnings from chemicals business in 2007: $4.56 billion
- Percentage of earnings from downstream operations in 2007: 23.6%


Daniel said...

Not sure how you're looking at these numbers. The percentage numbers for one year don't really prove that much, right?

For instance, let's assume I have a company made up of two parts. 1produces commodity x and the other refines commodity x. The split is 50-50.

If commodity x goes up a ton in one year, while refining margins contract, the business will show a high percentage of earnings from their upstream while showing little for the downstream.

Depending on a number of factors, including importantly one's view on the prospects of commodity x, buying a company that just produced it should be a better choice (or at least one more aligned with what you think will happen).

Even though percentages for the downstream portion of my hypothetical business would be low, they would still be a huge part of the company--but just wouldn't be showing it based on the earnings for the past year.

This isn't necessarily a knock on the integrated oil companies--but one does have to think about what they think of the upstream and downstream sides of the business. If they like one a lot better, they should go with a pure play. If they like the stability of having both, they should stick with the integrated. All other things being equal...

Right? I'm writing fast so not sure if I'm missing something...

Daniel said...

Of course, all other things--especially the prices paid for businesses--are equal. But that's what makes this game fun. :-)

DaveinHackensack said...


That's a good point about the effect of crude prices on the earnings split, but since those numbers were from last year's annual reports -- a year that featured some big crack spreads for refiners (if memory serves, around the peak summer driving season last year refiners were making ~$20 gasoline crack spreads on ~$70 crude) -- the chances are that last year's percentages of earnings from the refining businesses may have been higher than normal.

It's also a good point about those numbers being from just one year. I could have gone through the last few years of annual reports and averaged out the percentages, but to be honest, I was prompted to write the post because I happened to have both 2007 annual reports in front of me.

Last weekend when I was at my mother's she gave me a handful of annual report/proxy packages to fill out. When I got around to opening them yesterday, I found that the annual meetings for all of them had happened two months ago, but I decided to peruse the reports anyway. I thought it was worth pointing out the earnings splits because I think there is a misconception among some about what percentage of the integrateds' earnings come from refining -- I've heard people say the majority of Exxon's earnings, for example, come from refining. That's clearly not the case.

Regarding whether the integrateds should pick just one business or keep both for stability, in the case of Exxon Mobil at least, it seems to have leaned toward stability, in keeping with its tradition of being conservative (its significant chemicals business is in keeping with this as well).

Daniel said...

Fair enough. Different point and I'm not sure about this either but I think most of Exxon's revenues come from refining--which may be the cause of the misperception you noted.

By the way, have you read Titan yet? Must-read book for any Exxon shareholder! Rockefeller is one of my favorite people in all of history. And Chernow, as usual, does a great job writing about his subject's life.

DaveinHackensack said...

"I think most of Exxon's revenues come from refining--which may be the cause of the misperception you noted."

That might be true, though I don't think Exxon broke this down explicitly in the annual report I looked at.

I haven't read Titan, but if it's up there with Chernow's work on The Warburgs, I'm sure it's good.

Daniel said...

Ah, I liked the Warburgs book too! I'd rate it third out of the Ron Chernow books I've read--with House of Morgan coming in second, and Titan coming in first. Still haven't read Alexander Hamiltion...

DaveinHackensack said...


OT, but just learned something you might find interesting. Just looking at the semi-annual report for the T. Rowe Price Emerging Europe & Mediterranean Fund (TREMX), which happens to be the best-performing of the few funds I have owned over the last few years. Guess what the top holding is? A potash play: Russia's Uralki.

Also OT, have you looked at Issambres's write-up for DSNY on the VIC? That one looks interesting to me, particularly since the recent news seems to back up his initial thesis.