NEW YORK (TheStreet) -- Lost in the translation of Exxon's (XOM) and Chevron's (CVX) earnings reports was the surprising strength in their respective refinery segments. The same cheaper oil that crimped earnings upstream allowed wider margins in the downstream business.
In recent years Wall Street analysts have clamored for some exploration and production companies like ConocoPhillips (COP) , Marathon Oil (MRO) and Hess (HES) to break up and unleash shareholder value. But Exxon and Chevron show exposure to refining assets and remaining an integrated oil company may be proving to be a better long-term strategy.
There hasn't been a new refinery built in the U.S. since 1976. So operational efficiency is even more important for integrated oil and gas companies that are now facing a weaker price environment for oil and gas. Softer energy prices means integrated companies can also benefit from cheaper oil prices by strategically creating a more economical product mix which may be useful to help lower operating expenses. That's important considering how Wall Street is increasingly focusing on cash flows within the sector.
So are companies now removed from the refinery segment putting too much emphasis/speculation on E&P shale drilling success, considering energy prices are now depressed?
That's debatable. But the inability to offset high costs of exploration and production with downstream revenue makes stocks like ConocoPhillips (now minus refiner Phillips 66 (PSX) ) and Marathon Oil (now without Marathon Petroleum (MPC) ) more vulnerable to pricing pressure.
It should be said that despite lower crack spreads (profit margin from breaking down a barrel of crude oil into refined products) Phillips 66's recent earnings were driven by improved refining and marketing margins and both that company and Marathon Petroleum are seeing massive opportunities in the midstream to build infrastructure needed to move crude from shale plays into markets to be used for feedstock for new refined products. The potential for midstream assets could see increased investor enthusiasm for master limited partnerships in 2015. That bodes well for Phillips 66 Partners (PSXP) which IPO'd in July 2013 and MLPX LP (MPLX) , which went public two yeas ago.