Is the End of the Integrated Oil and Gas Model Near?
To boost returns, integrated firms are shedding downstream assets.
Within the integrated space, we are currently witnessing a number of firms increasingly moving investment away from downstream operations. While not suggesting that the integrated model is dead, it certainly indicates that management believes returns will not revisit historical levels. Instead of ending integration completely, we expect companies to reduce investment and opportunistically shed capacity in the coming years in an effort to improve returns.
Refining operations have, on average, generated lower returns than exploration and production operations. However, the recent recession and subsequent drop in refining profitability brought to light the new reality for refining, particularly in developed economies. High oil prices, combined with an economic recession, may have permanently impaired demand for refined products. Gasoline demand is especially affected by the recent strides in fuel efficiency and hybrid technology. As a result, refining capacity in North America and Europe far exceeds demand. In addition, low cost export oriented refineries in Asia and the Middle East offer additional supply pressures. These factors add up to an uncertain future for refiners.
Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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