Size and Scope Aren’t Helping Big Oil

Being big isn’t always easy.

Oil giants like

Exxon Mobil

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for years have touted the reasons to keep several businesses on the energy supply chain under one roof. Friday wasn’t a good day for that argument.

Exxon said that its second-quarter profit was $3.13 billion, down from $3.95 billion a year earlier. Revenue dropped 6%. Chevron did slightly better, though not in a way that was particularly encouraging. The company said that net income rose 26% to $4.3 billion due in part to its receipt of a breakup fee from a scuttled deal to buy

Anadarko Petroleum

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Sales fell 10%.

Earnings in both companies’ upstream businesses rose, partly because oil-equivalent production jumped 7% from a year ago at Exxon and 9% at Chevron. But lower commodity prices, specifically that of natural gas, were a drag.

Integrated oil and gas companies’ businesses are meant to be more insulated from price swings than pure exploration and production or refining and marketing firms because they are in cyclical businesses that move independently. In theory when the supply chain becomes uneven, one business should help make up for another.

New pipelines in the Permian Basin, a big driver of growth for Exxon Mobil and Chevron, should help boost realized prices of oil and gas coming out of the area.


Angus Mordant/Bloomberg News

The opposite is happening. As their drilling, particularly in the Permian Basin, floods the market with commodities, the end of the supply chain has come under pressure. Earnings fell in both Exxon and Chevron’s businesses outside of upstream. Margins and prices in three of four business lines are near 10-year lows at Exxon.

The downstream part of the business may be the first to correct. Exxon has said that refining margins are improving and it continues to invest heavily in chemicals to take advantage of a glut of natural gas near the Gulf of Mexico that can be used as feedstock. Unfortunately, the picture for those commodity prices is cloudy.

New pipelines in the Permian Basin, a big driver of growth for both companies, should help boost realized prices of oil and gas coming out of the area, which have been depressed because of infrastructure constraints. But that is likely to keep the market flooded with supply at a time of slowing global economic growth.

Big oil has the balance sheet to survive a rocky period for the industry. Integrated companies’ size and scope aren’t helping at the moment.

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