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Why Downstream Earnings Were ExxonMobil’s ‘Rainmaker’ in 2Q15

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Downstream earnings

In 2Q15, ExxonMobil (XOM) experienced solid downstream earnings growth. ExxonMobil’s downstream business consists of refinery operations and petroleum products sales. In 2Q15, ExxonMobil’s refining margins strengthened in both the US and Europe. Downstream non-US earnings improved spectacularly, increasing more than fivefold to $1.1 billion in 2Q15 from 2Q14.

Increasing crude oil and natural gas production has led to lower raw material and energy costs for integrated energy companies like ExxonMobil. This has strengthened refining margins over the past few years. Stronger refining margins in the US added $140 million to XOM’s downstream earnings. ExxonMobil also benefited from new startups across its global operations, mainly in Africa, Indonesia, Papua New Guinea, Canada, and the US, over the past 18 months. Plus, XOM’s product offerings and better asset mix boosted 2Q15 earnings.

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ExxonMobil’s chemical segment

The company’s chemical segment also did relatively well compared to the year-ago quarter. Here, net income in the US increased 39%. XOM’s non-US chemical segment net income increased even more, rising by 63% from 1Q14 to 1Q15. The rise in the chemical segment’s income was primarily due to lower input price and greater proportion of higher valued products in production volume. Meanwhile, 2Q15 chemical product sales were a tad lower compared to 2Q14, declining by 1%.

Crack spread increased in 2Q15

To give you an idea of the improving refining advantage, the US Gulf Coast 3:2:1 crack spread increased during 2Q15. It averaged ~$24 per barrel from April to June this year. In comparison, the spread averaged $22 per barrel during 2Q14. Rising crack spreads typically result in increasing refinery margins. The US Gulf Coast is one of the largest refining regions in the world with ~8.2 million barrels per day of refining capacity. 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.

Volume stayed relatively flat

ExxonMobil’s downstream and chemical production volume did not change significantly from 2Q14 to 2Q15. Refinery throughput decreased ~3%, while chemical product sales decreased 1% during the same period.

Compared to ExxonMobil’s 112% increase in downstream earnings in 2Q15 over 2Q14, Royal Dutch Shell’s (RDS.A) downstream earnings increased 116% over the same period. YPF’s (YPF) 2Q15 operating income from its refining and marketing segment increased 32% over 2Q14. ExxonMobil makes up 1.7% of the SPDR S&P 500 ETF (SPY) and 15.7% of the Energy Select Sector SPDR (XLE).

Next, we will discuss ExxonMobil’s year-to-date financial results.

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