Here's How Chevron Is Outperforming Downstream Peers

The refining business is no longer as profitable as it was, and companies like Royal Dutch Shell are loosing out. Chevron isn't worried, however.

Jun 17, 2014 at 11:36AM

Big oil is called that because, well, it's big. These companies are also integrated, however, and for Royal Dutch Shell (NYSE:RDS-B) this is proving to be a problem right now. Chevron (NYSE:CVX), on the other hand, is not worried as it has been a leader in the downstream market for some time.

Refining problems
Big integrated oil companies, in their most basic form, are separated into two parts: upstream and downstream. The upstream side of the business produces the oil and gas, while downstream converts the oil and gas into usable products.

One of the most essential components of the downstream industry is refining, where crude oil is turned into fuel and other refined products. Once upon a time this was a lucrative business, and it still is within the domestic market.

However, the global refining industry has been struggling for some time. What's more, many European refiners are now reporting negative profit margins, meaning that they are essentially losing money. As a result, refining capacity has been declining.

Usually, a refinery capacity shutdown would lower supply, leading to price hikes. As the price of Brent and the cost of doing business within Europe both rise, refining margins are collapsing. Many refiners just can offload product at higher prices.

Shell has seriously suffered from this downturn. The company's CEO, Ben van Beurden, described the company's refining sector results as "unacceptable." Nevertheless, the company is stopping short of spinning off its refining division like ConocoPhillips did to increase returns.

That being said, Shell has divested some underperforming downstream assets, including refining and marketing businesses within Australia, Italy, Denmark, and Norway.

Still, the company has stated that the downstream business represents a key element of the Shell business model. As a result, it is here to stay. All in all, Shell plans to divest up to $15 billion in downstream assets, although some analysts believe that this figure could reach $30 billion when all is said and done.

Shell has nearly $300 billion in assets, so pruning the portfolio by $15 billion, or 5%, is not really going to make that much of a difference.

Well positioned
While Shell is struggling to maintain downstream profitability, Chevron is steaming ahead. It is often said that Chevron has some of the best downstream operations within the sector, and the company's recent downstream outperformance has shown this to be correct. Chevron has outperformed almost all of its peers on a margin per barrel of refined product basis since 2009.

Chevron's average downstream margin during the five years since 2009 has been just under $2 per barrel, while competitors have reported an average margin of approximately $1.50. There is a reason for this outperformance, though: the crowning jewel of Chevron's downstream empire, Chevron Phillips.

Chevron Phillips
Chevron Phillips produces chemical products. It would appear that while the traditional refining market has come under pressure recently, the more specialist chemicals refining market has actually outperformed. This is not to say that Chevron's peers do not have their own chemicals downstream segments; they do. However, they are nowhere near as efficient as those of Chevron Phillips.

Chevron Phillips has beaten all of its peers by a significant margin during the past five years with utilization running at over 90%, compared to the industry average of 86%. Further, Chevron Phillips' EBITDA/average asset returns have exceeded 30% during the past three years, 50% more than the 20% return reported on average by peers.

Foolish summary
Collapsing refining margins have had their impact on integrated oil companies like Royal Dutch Shell during the past few years, and this is unlikely to change anytime soon. However, Chevron has been able to outperform thanks to the company's one-of-a-kind chemicals division. Chevron Phillips is a really attractive asset for Chevron, providing the company with a stable income stream from the production and sale of chemical products.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Rupert Hargreaves owns shares of Chevron. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers