Oil and gas business in changing times

Abstract

The top 5 oil majors (British Petroleum, ExxonMobil, Total, Chevron and Royal Dutch Shell) are analyzed in terms of investments, earnings and financial & operational performance along the entire business value chain, for a period of 5 years. One of the key objectives is to understand how the Upstream and Downstream segments may play different roles in the definition of a winning corporate strategy, considering how they may reveal very different strengths and weaknesses during crude oil price crises. When the crude oil price goes down, the upstream sector is running big cost cutting measures, in order to reduce expenditures and keep acceptable gross margins per barrel of oil equivalent. On the other hand, the downstream segment receives cheaper raw material without a significant decrease in the final price of the oil products. Thus, how can oil companies leverage this flexibility in order to pass successfully through periods of crude oil price slides, and even take advantage of those? The paper aims to analyze the correlation between oil price and oil volume produced on one hand, and investments and earnings, split by business segments, on the other hand. The variation of investment and earnings is hence compared to crude oil price fluctuations for a clearer picture of the business profitability per segment during the peak and bottom periods of the oil market. Upstream and Downstream segments are also benchmarked against each other to understand the role that each of them is playing in the industry. The results are expected to provide some trend lines to understand how much the cost cutting measures are impacting the overall business, as well as to appreciate whether the reduction in the oil production, which in theory should be followed by a rise in prices, is indeed in the best interest of the oil majors. Going further into analysis, the paper is trying to define an optimum production interval, that will maximize profits along the entire value chain (upstream and downstream) of the oil business, defined by both the production volume of crude oil (replacement cost per barrel in accordance with volume), as well as the price per barrel of oil equivalent. The analysis takes into account official sources exclusively, i.e. oil companies’ websites, corporate crude oil production reports, annual financial reports and investors’ analyses.