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ExxonMobil’s 2Q15 Upstream and Downstream Earnings Can Diverge

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ExxonMobil’s 2Q15 upstream and downstream margins

In the previous article, we saw that ExxonMobil’s (XOM) upstream earnings may continue to decline in 2Q15, but at a rate lower than what we witnessed in 1Q15 on a sequential basis. This is primarily due to some improvements in crude oil prices, which were in a free fall from June last year until March this year.

In this article, we will discuss why ExxonMobil’s downstream segment can see its earnings increase, although at a rate significantly lower than in 1Q15, sequentially. Downstream earnings for an integrated energy company are pinned to crack spread movements and refinery demand, which we’ll discuss below.

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Crack spread inflated in 2Q15

Crack spread averaged $24.41 per barrel from April to June this year. In comparison, the spread averaged $21.36 per barrel in 1Q14. So, the spread increased ~14% in 2Q15 compared with 1Q15. A higher spread typically induces refinery margins to improve. The 3:2:1 crack spread reflects the difference between the cost of three barrels of crude oil and the price of two barrels of gasoline and one barrel of diesel.

ExxonMobil (XOM) experienced volatility in its refining margins in the past few quarters. In its diversified international operations, some regions saw weaker margins as new capacity additions outpaced demand. In North America, increasing crude oil and natural gas production has led to lower raw material (crude oil) and energy costs. This has strengthened refining margins in the region over the past few years. Investors should also watch for refinery downtime on maintenance. Low refinery throughput affects refiners like XOM negatively.

ExxonMobil’s operating metrics compared to peers

ExxonMobil’s EBITDA (or earnings before interest, tax, depreciation, and amortization) decreased 44% in 1Q15 over 1Q14. In comparison, BP Plc.’s (BP) EBITDA decreased 24%, while Cenovus Energy’s (CVE) EBITDA decreased 69% from 1Q14 to 1Q15.

On the other hand, YPF S.A.’s (YPF) EBITDA increased 21% during the same period. XOM comprises 1.9% of the SPDR S&P 500 ETF (SPY).

Read the next part of this series to understand ExxonMobil’s cash flows and capex plans.

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