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Low oil prices have been less of a drag on the big integrated oil companies than it has for smaller producers. Diversified portfolios have allowed the largest oil companies to weather the storm better than their smaller competitors.
To be sure, Big Oil has not gotten off lightly. In fact, some of the largest megaprojects that are only undertaken by the oil majors appear to be huge financial burdens. Having spent billions of dollars on extraordinarily large and complex projects -- ultra-deepwater, LNG, large oil sands projects -- the costs are a colossal weight around the necks of the oil majors. The oil industry has scrapped an estimated $200 billion in future offshore and LNG projects as the industry backs away from the massive costs.
Smaller onshore shale projects that have shorter lead times look attractive by comparison, despite shorter lifespans and relatively high breakeven costs. Wells can be drilled for a few million dollars over the course of a few months, rather than the billions needed for the megaprojects that can take a decade to develop.
At a time in which OPEC is fighting for market share, which could lead to oil prices remaining low for an extended period of time, smaller has its advantages. "The major oil companies are being squeezed," CEO of Italian oil giant Eni (NYSE:E), Claudio Descalzi, said in Vienna in early June. "We need to slow down and look for easier projects away from the complexity of the last 10 years."
Nevertheless, it pays to be big and diversified. Complex megaprojects may be weighing on the balance sheets of the oil majors, but their extensive downstream assets are paying off.
According to the EIA, Big Oil's profits from their upstream divisions declined by $28 billion in the first quarter of 2015, an 80% drop off from a year earlier. But their first quarter losses were offset by an increase of $6 billion in profits -- or a 95% jump -- from the downstream sector from the same quarter in 2014. That has acted as a cushion, softening the blow of the oil bust.
The crash in oil prices causes direct losses when oil companies go and sell crude oil. But lower oil prices also mean lower costs for refining, for which crude is a key input. The prices for refined products doesn't always track crude 1:1. They are closely correlated, but crude oil and refined products are two separate markets (actually, there are many separate markets beneath those two umbrella terms).
Oil prices collapsed over the past year, but they experienced a deeper drop than downstream products. As a result, the profit margin for refineries widened. Refineries are now churning out much more product than in the past. With Americans suddenly thirsty for cheap gas, buying more SUVs and driving more, refineries are putting off planned maintenance to capitalize on the good times.
Smaller drillers don't have that luxury. Their revenues come disproportionately from selling crude oil. For many of them, their sole focus is on drilling wells and selling oil. And if the wells they have drilled need higher oil prices to breakeven, the last few quarters have likely been extra painful.
That is why we have seen the share prices of smaller companies crash much harder than the larger integrated oil majors.
The oil export ban that exists in the United States is also fueling this dynamic. Refiners enjoy a larger margin than they otherwise would because of the localized glut that has taken place within U.S. borders. Refined products are allowed to be exported, and as a result, they tend to sell for higher prices, as they are more closely linked to prices that are seen on the international market.
That is also why oil companies that are much more leveraged within North America, and much more concentrated in the upstream sector, are much more vociferously attacking the ban on oil exports. The lobby group setup to arm-twist the U.S. Congress and convince them to remove the export ban is made up of North American drillers that are less diversified than the oil majors.
The oil majors would like to see the ban lifted, sure, but their refining divisions sort of muddy the calculus.