Downstream Companies Outperformed the Energy Sector



Price performance

The downstream companies such as Phillips 66 (PSX), Valero (VLO), Tesoro (TSO) and others shown in the chart below rose by an average of 25%. On the other hand, the energy sector fell by 21% on a year-to-date basis on December 8, 2015.

Companies such as PBF Energy (PBF), Tesoro (TSO) and Valero Energy (VLO) have risen more than 40% on a YTD basis. The energy sector benchmark, the Energy Select Sector SPDR Fund (XLE), has fallen 21% on a YTD basis. The change in the price of downstream companies is negatively correlated to that of upstream companies. Upstream companies that operate with a production mix of greater than 90% gell by an average of 52% on a YTD basis. This basket of upstream companies includes Vaalco Energy (EGY), Kosmos Energy (KOS) and Denbury Energy (DNR). Downstream companies draw revenue from the refining and marketing of petroleum products.

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Sales performance

In 3Q15, the large capped refiners Phillips 66 (PSX), Valero Energy (VLO), Delek US (DK), and Alon USA Energy (ALJ) posted contraction in sales of 7%, 5%, 4%, and 3%, respectively, on a year-over-year (or YoY) basis. However, the gross profit of these companies grew 13%, 24%, 20.4%, and 20.5%, respectively, on a YoY basis, in 3Q15. The sales data of the top ten large capped companies indicate that sales were flat YoY in 3Q15.

The flat sales coincide with steady demand for refined product in transportation and other industries, as well as the fall in market prices for refined products. Again, this indicates that greater refining margins and lower operating cos —lower energy cost for refining—are the major drivers of the profitability margins of these companies.


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