As Big Oil unveils second-quarter results this week, investors will be looking down more than usual.
While the upstream bit of the major oil companies -- the business of exploring for reserves and producing them -- usually dominates proceedings, the downstream refining, marketing and chemicals operations have moved into the spotlight. The crash in oil prices has sent upstream profits tumbling, leaving the downstream businesses to (try to) pick up the slack.
Take Exxon Mobil. In 2015, net income at its upstream business slumped to about $7 billion, down from more than $27 billion the year before. Thankfully, its chemicals and refining and marketing businesses did better -- although the extra $3.6 billion they made last year hardly saved the day.
Still, every little bit helps even at this scale, especially when you've got hungry dividend collectors to feed. Of the five majors, only Exxon is still showing profits in its upstream business, so proportionally, downstream is where it's at right now:
The problem with this is that the downstream is also sputtering. Refining and marketing churned out profits last year as the collapse in oil prices spurred extra demand for fuels like gasoline. This year, while hopes for a repeat ran high through much of the first half, they were dashed amid a persistent glut in inventories of refined products and weak margins:
Expect those weaker margins to weigh on results as they trickle out this week.
More ominously, the unusually early seasonal drop in gasoline margins this year -- something I wrote about here -- points to a hard slog through the rest of the year to try to clear the glut of fuels in storage tanks. The implication is that refiners of all stripes will ease back and go down for a bit more maintenance than usual.
Since refiners are the ones who actually buy virtually all of the world's crude oil output, that doesn't bode well for the majors' upstream business through the rest of this year, either.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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