Walking a tight rope: downstream firms to reposition for uncertain times ahead

In the refining sector, gross refining margins are expected to remain healthy over the rest of the decade, supported by asset closures, upgrades to product demand outlook and lagging capacity growth. However, a sharper-than-expected fall in gasoline and diesel demand remains a significant risk to future margins. 

The chemicals sector, meanwhile, is looking at a U-shaped recovery. Ethylene margins will remain weak through 2030 due to overcapacity (primarily in China), with recovery capped until demand catches up. 

In a recent report, our analysts took a look at what is helping and hindering the downstream sector and how players are likely to fare over the coming years. Fill in the form to receive a complimentary extract from the report and read on for a brief introduction. 

One downstream playbook does not fit all 

Downstream accounts for around 20% of the corporate value of the 23 integrated and pure-play companies (about US$830 billion in NPV10).  

Exposure varies dramatically. The Majors run global networks, while national oil companies (NOCs) and mid-cap international oil companies (IOCs) are concentrated in a handful of regional strongholds, reflecting their domestic mandates and market focus. 

Downstream’s role and footprint also differ substantially from player to player. ExxonMobil has the world’s most valuable downstream business (worth US$107 billion or a third of company’s value), with next-generation specialty businesses a key strategic driver. Sinopec and OMV are the only integrated firms generating more than 50% of value from downstream. Eni has the least exposure (3%), following asset closures and Enilive’s partial sale to KKR. 

Challenged long-term fundamentals for downstream have companies becoming less integrated. Growth focused on upstream is one key driver of this shift. Early transition impacts have been concentrated in road fuels, leaving crude and gas value supported by aviation, industry and petrochemicals. Trimming of refining portfolios is another culprit. Euro IOCs are closing assets as costly pressure to decarbonise operations mount.  

Downstream investments generally tend to be organic, focusing on asset maintenance with limited footprint growth. Aramco, however, is the outlier, using mergers and acquisitions to boost its downstream operations. The moves are relatively small and will not shift the company’s upstream balance, but expanding its crude processing capacity will help it place domestic barrels during the energy transition. More equity stakes in integrated assets are likely. 

Drawing the short straw on investment 

Downstream businesses, especially refining, will struggle to compete for company-wide capex, with investor expectations further capping total reinvestment in the sector. Firms are prioritising shareholder returns and have already cut their low-carbon spending. 

For the integrated refiners, upstream will dominate capital allocation, while pure-play refiners will continue to favour brownfield investments. Corporate reinvestment rates will remain at less than 70% for the group, and downstream reinvestment rates will behave similarly.  

NOCs are the one exception, committing the greatest amount of growth capital, with reinvestment rates at more than 100% of downstream operating cash flow. Sinopec is currently the largest downstream investor, but Aramco could overtake it as it pushes for 4 mmbbl/d of integrated throughput. Shell led the Majors on capex during the first half of the decade, but has lost its crown to Exxon, and could slow further with potential high-grading. 

Refining is where the cash is 

Refining remains the cash engine, at around 57% of downstream EBITDA through 2030. Chemicals EBITDA is set to grow 29% by 2030, by our estimates, as margins recover. 

ExxonMobil, Shell and the US independents lead when it comes to free cash flow generation, outpacing the large NOCs, such as Sinopec and Aramco, weighed down by heavy reinvestment.  

The Majors have successfully high-graded their portfolios, with downstream returns some 6 percentage points higher than their corporate averages. NOCs’ less efficient assets mean they generate lower returns. Other IOCs perform better than NOCs, but still trail the Majors when it comes to portfolio efficiency. 

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