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MarketScreener Homepage  >  Equities  >  Nyse  >  Exxon Mobil Corporation    XOM

EXXON MOBIL CORPORATION (XOM)
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Oil Firms Tap Refining, Retailing -- WSJ

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05/17/2018 | 08:48am CEST

Petrochemicals, gas stations offer growth, as swings in crude prices roil drilling

By Sarah Kent 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 17, 2018).

Major oil companies are doubling down on gas stations, refineries and processing plants, betting on a once-unloved part of the energy business to shore up profits and expand their customer bases.

BP PLC plans to open thousands of gas stations in new markets such as Mexico and India over the next three years. Exxon Mobil Corp. is investing heavily to expand its petrochemical operations, which make products like plastics and the basic ingredients for all sorts of household goods. In November, Royal Dutch Shell PLC started work on a massive petrochemical complex in Pennsylvania -- its first big new plant in the U.S. since the 1960s.

Companies are expected to add 7.7 million barrels a day of new refining capacity by 2023, according to the International Energy Agency. In petrochemicals, it estimates investment in the U.S. alone over the next five years will add 13 million tons a year of new capacity to produce ethylene, the main component of plastic.

American refining, in particular, is booming. Surging shale production has provided plentiful, cheap oil close to the country's petrochemical heartland around the Gulf Coast. Fuel demand is expected to rise. All those dynamics helped drive Marathon Petroleum Corp.'s agreement to buy rival Andeavor last month for $23 billion, a deal that would create the country's largest refiner.

As smaller refiners consolidate, the world's major oil companies are promising that investment in their so-called downstream businesses -- and restructuring efforts they are simultaneously pursuing to improve efficiency -- will add billions of dollars to earnings. The focus on downstream grew amid a period of lower oil prices and concerns over long-term oil demand. Cheaper crude -- the primary feedstock for refining -- boosted margins and profits. Oil companies' "upstream," or oil exploration and development, meanwhile, was suffering from lower prices.

"Upstream at some point was not making money," said Tufan Erginbilgic, head of BP's refining and retail arm. That gave his unit a fresh imperative to "really significantly contribute to group performance, because we have to."

Today, higher crude prices pose a risk that margins from refining won't be as strong as they have in recent years. And all the new investment in capacity could end up swamping the market, analysts warned.

"It remains to be seen the way demand is going to shape up," said Jonathan Leitch, research director at Edinburgh-based consultancy Wood Mackenzie.

Big companies say the downstream investment is worth it -- no matter where crude prices head. Executives say that integrating the oil they produce with refining and retail businesses can maximize profits, and help steady finances amid the sometimes-wild swings in crude.

Investor pressure also has mounted on the major oil companies to start positioning for an age when fossil fuels may no longer power the world's fleet of passenger cars. Executives are betting their big petrochemical plants can offer diversification. According to the IEA, petrochemical production is expected to be the biggest driver of oil demand growth in the coming decades.

Gas stations, too, are promising new growth. They offer access to emerging markets, where demand for fuel is expected to be especially robust. A geographically wide network of branded, retail outlets also could create new opportunities where the industry now sees threats -- such as electric charging stations.

Last year, Shell bought one of Europe's biggest electric-vehicle charging companies, New Motion. It has teamed up with a group of car manufacturers to install more than 500 fast-charging points at existing Shell stations, across 10 countries in Europe over the next two years.

The rise of electric vehicles is "a reality, and an opportunity," Shell's downstream director, John Abbott, told analysts in March. "We are adjusting our offer to meet this new demand."

BP started its push before oil prices collapsed in 2014. The company was seeking stability after selling off billions of dollars in assets to pay for cleanup fees and legal costs associated with its catastrophic blowout in the Gulf of Mexico in 2010.

It sold off some of its refining businesses but resisted investor pressure to get rid of its downstream unit altogether. That was despite it being an industry laggard. Mr. Erginbilgic, the downstream boss, eliminated a layer of management and ordered up targeted improvement plans at each plant.

"At that time, we were the worst in the industry. Literally the worst," he said. BP says now it is on track to increase earnings from Mr. Erginbilgic's division by $3 billion between 2017 and 2021, doubling the improvement made in the two years from 2014.

Over the next three years, BP sees the biggest opportunity to boost earnings in gas stations. It is doubling down on partnerships with convenience stores, which has boosted profitability at gas stations in mature markets, and is pushing hard into new countries where demand is expected to grow.

BP says it is on track to open 500 retail sites in Mexico by the end of the year, up from zero at the start of 2017. Elsewhere, it is looking to build gas stations in India, China and Indonesia.

Write to Sarah Kent at sarah.kent@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
BP -0.51% 583.9 Delayed Quote.12.24%
EXXON MOBIL CORPORATION -0.12% 86.5 Delayed Quote.3.42%
ROYAL DUTCH SHELL -0.51% 29.54 Delayed Quote.6.82%
WTI -0.24% 71.77 Delayed Quote.19.17%
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Financials ($)
Sales 2018 320 B
EBIT 2018 31 455 M
Net income 2018 19 759 M
Debt 2018 34 746 M
Yield 2018 3,73%
P/E ratio 2018 18,63
P/E ratio 2019 14,82
EV / Sales 2018 1,25x
EV / Sales 2019 1,20x
Capitalization 366 B
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Mean consensus HOLD
Number of Analysts 20
Average target price 88,7 $
Spread / Average Target 2,5%
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Managers
NameTitle
Darren W. Woods Chairman, President & Chief Executive Officer
Andrew P. Swiger Chief Financial Officer & Senior VP
Samuel J. Palmisano Independent Director
Steven S. Reinemund Independent Director
Kenneth C. Frazier Independent Director
Sector and Competitors
1st jan.Capitalization (M$)
EXXON MOBIL CORPORATION3.42%366 225
BP12.24%154 378
CHINA PETROLEUM & CHEMICAL CORP12.23%120 326
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PHILLIPS 6613.57%53 334