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Shell’s Downstream Segment Is Resisting Lower Oil Prices

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Jan. 12 2016, Updated 8:06 a.m. ET

Shell’s downstream segment

Royal Dutch Shell (RDS.A) has 3.1 MMbpd (million barrels per day) of refining capacity. Refining capacities for Exxon Mobil (XOM), BP (BP), and Chevron (CVX) are 5.2, 2.0, and 1.9 MMbpd, respectively.

Shell’s refining capacities are spread worldwide. The main portion of Shell’s capacity, around 39%, is in the Americas. This is followed by 35% capacity in Europe and Africa, and 26% in Asia and Oceania.

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Shell’s refining margin indicators

The income from refining operations depends primarily on refining margins and crack spreads. Shell closely tracks refining margin market indicators such as the US West Coast (or USWC) margin, the US Gulf Coast Coking (or USGCC) margin, the Rotterdam Complex margin, and the Singapore margin.

In 3Q15, Shell’s downstream segment earnings rose by 46% compared to 3Q14 due to widening refining margins. The USWC margin rose steeply by $11 per barrel to $22 per barrel. USGCC margins doubled to $14 per barrel in 3Q15. However, Rotterdam complex and Singapore margins rose marginally to $6 per barrel and $2 per barrel, respectively. Refinery utilization rates fell from 92% in 3Q14 to 89% in 3Q15.

Shell’s chemical margin markers

Shell’s chemical segment closely tracks US ethane, Western European naphtha, and North East–South East Asia (or NESE) naphtha margins. In 3Q15, US ethane margins halved to $463 per metric ton over 3Q14. On the other hand, Western European naphtha margins increased steeply over 3Q14 to $878 per metric ton in 3Q15. NESE naphtha margins also rose by 19% over 3Q14 to $448 per metric ton. So tracking these markers can point to the company’s expected margins in the near term.

If you’re looking for exposure to refining and marketing sector stocks, you can consider the iShares US Oil & Gas Exploration & Production ETF (IEO). The ETF has ~30% exposure to refining sector stocks.

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