Downstream Oil Stock Analysis: Refineries are Fine

Downstream Oil Stock Analysis is understood by examining the oil supply chain.

Oil is not only about Exxon or Chevron. Here we offer you an alternative. This downstream oil stock analysis opens you to a new investing perspective. To understand more about the oil industry, the energy that stands still till the end of time. No matter how green human mission.

In This Issue

Downstream Oil Stock Analysis Counter The Myth

Crude as Fuel

The refineries company does not simply pass the oil from upstream like Chevron or Exxon to the end consumer. The oil from the upstream group needs to be converted to more feasible forms like LPG, naphtha, diesel, asphalt, heating oil, kerosene, gasoline. The price of these groups of hydrocarbon products depends on the price of the raw material: crude oil. Lucky for the refiner, they could pass the cost of the raw material to the end-user.

So it is logical to make the assumption that volatility of oil price doesn’t affect refineries’ financial performance.

When oil prices surge, refineries sell gasoline more expensive. And when oil prices slump, they adjust the price lower.

But in our opinion, by examining more detail about the refinery process, we dare to say that they favor low prices.

Refiners use oil not only as raw material to be magically transformed as gasoline and co, but also they need oil as a fuel. The refinery is an extreme process that involves ultra-high temperature, pressure, and all of these processes consume a high amount of energy. The oil used in this refinery process is difficult to pass to consumers. So, for us, the refinery favors more toward low commodity prices.

Wait, don’t get me wrong. Just a bit.

To be integrated

Thus, due to its role as commodity price absorber, The Big Boys of Oil build their own refinery. When the oil price gets slumped, the damage could be partially offset.

Because their refinery gets cheaper raw material.

Consumer Behavior in Downstream Oil Stock Analysis.

It is closer to consumers, so we look at them.

In the scenario of a drop in oil price due to oversupply, refineries get some advantage. The low fuel will spark more consumption for end-user. 2014 as an example, in that low environment of commodity prices – $2.64 per gallon – Americans buy more SUVs than any other type of car.

2018, the trend still holds – making the boom of sedans, coupés, hatchbacks, and station wagons like history (51% of total sales of US cars in 2008).


The abundance of crude oil could happen due to too much production. Imagine this case, when the economy is at a peak, demand everywhere, people have money to buy a fuel-hungry vehicle, people travel too far away, the need for oil gets surged. The upstream group responds by producing more oil. Everything is good, till one day, they produce too much. FYI, producing and consuming is a different beast, people can stop travel, going to the bar with their SUV, but once the oil well is drilled, it can be reversed or closed as nothing happens. They need to be kept drilled and drilled. The reality is much more complex, there is a contract with an oil services company, people, equipment, etc. One sure thing, supply can immediately catch up with the demand.

Low Demand

But in the scenario of low oil prices caused by low demand, the story is much bleaker. Low demand is usually coupled with low economic growth. In these circumstances, refinery, like any other industry, gets bitter experience.

In 2021, for instance, Consumer slashes their spending for leisure, travel, visit far families due to the high price of fuel. And with the Tesla sedan getting more and more exciting, the need for refineries products could be diminished. Not good news for refineries boys. Another cause is the existence of alternatives like renewable energy, nuclear, or hydrogen.

Downstream Oil Stock Analysis Give us No Moat for The Existing Players

In our honest opinion, Oil and economic moat can’t exist in the same paragraph. Except for Saudi Aramco with its blessed by God reserve. Coupling refineries with an upstream facility like Exxon and Chevron help them to cope with the low oil price, but it is not significant. So, telling an investor that being integrated gives them an advantage is actually a weak word. Being a low-cost producer gives you a more comfortable position, but of course, you can choose it. Exxon could spread the cost through its refineries, but it was unmatched by Saudi Aramco.

We will back to the economic moat later.

Honorable Mention

Let’s get more practical. In the real world, pure refineries are difficult to find. One most popular is PBF Energy (NYSE: PBF), unfortunately, it is more associated with unbranded products. More often than not, refineries are coupled with another business entity like Valero energy with its ethanol unit. In our opinion, the economic moat of refineries plus consumers (ethanol in the Valero case) is weaker than upstream plus refineries like Exxon or Chevron. The ethanol factory could not absorb the volatility of oil as its raw material.

Same case with HollyFrontier (NYSE: HFC) that has a lubricants factory unit. Still, it can’t serve as a shock absorber when oil prices swing.

Downstream Oil Stock Analysis lead us to Moat Rank.

Let classify the players in the oil battleground.

  1. The best companies are those that have low-cost production. We like Saudi Aramco. The company enjoys low-cost producers and economies of scale as a durable competitive advantage. In the oil universe, maybe – just maybe, Aramco is the only exception.
  2. Far Under Aramco’s high economic moat, there are Chevrons, Exxon, BP, companies with integrated business models. The existence of refineries gives them a partial absorber of the slump in oil price.
  3. Lubricant makers or ethanol makers that coupled with refinery enjoy the availability of raw material, but the financial performance has no significant difference. On the other end, a refinery that is coupled with ethanol or lubricant has little benefit. Whatever. We do not recommend both of them.
  4. Independent player of refineries is in the last place. They are of one many companies that Warren Buffett said that they need a group of prayer when raising the product prices.

Big Picture

Really difficult to find a company with a durable competitive advantage in the oil industry. We recommend you to visit once again our post about Oil Stock Analysis

NB: When we said Exxon, we mean ExxonMobil