Integrated Oil & Gas Company

What is an 'Integrated Oil & Gas Company'

An integrated oil and gas company is a business entity that engages in the exploration, production, refinement and distribution of oil and gas. Given the high entry costs relating to many oil and gas industry operations, many of the world's largest oil and gas companies, like Chevron Corporation and Exxon Mobile, are integrated. Typically, integrated companies divide their various operations into categories: upstream, which includes all exploration and production endeavors, and downstream, which is confined to refinement and marketing activities.

BREAKING DOWN 'Integrated Oil & Gas Company'

Because integrated oil and gas companies are involved in so many facets of the fossil fuel industry, often their business bottom lines can be counterintuitive. For example, during times of rising crude prices, an integrated oil and gas company may actually have lower profit margins than a nonintegrated rival as a result of having greater downstream than upstream capability, or vice-versa.

Oil & Gas Operations

Oil and gas operations can be categorized into upstream, midstream and downstream activities. The upstream activity involves oil and gas exploration and production, the midstream activity focuses on oil and gas transportation and storage, and the downstream activity deals with oil and gas refinement and marketing. These seemingly different business activities naturally require specialized and dedicated resources to manage, and there are many stand-alone upstream, midstream and downstream oil and gas operators. However, integrated oil and gas companies with both upstream and downstream operations are still a major force within the oil and gas industry.

Integrated vs. Independent

There are pros and cons for being an integrated or independent oil and gas company. With vertically integrated operations, an integrated oil and gas company is in direct contact with the energy end market and may gain certain market intelligence. This in turn helps it better manage oil and gas productions based on changing market demands. However, an integrated oil and gas company can be difficult to value when different types of production and operating assets are all lumped together, leading to potentially lowered market valuation. An independent oil and gas company with only one type of operation brings a sharper focus to its business activity, such as eliminating competing resource allocations among different businesses. But the lack of profit counterbalance between upstream and downstream operations could be a challenge for independent oil and gas companies in unfavorable market conditions.

Profitability Interdependence

An independent oil and gas company may thrive or wither on the rise or fall of the oil and gas prices, while an integrated oil and gas company often has less concern about price volatilities. Balanced by its upstream and downstream operations, the business of an integrated oil and gas company could essentially hedge its profits against market downturns. For example, when crude oil productions experience diminished profitability from declining oil prices, refining operations at an integrated oil and gas company would likely see expanded profit margins because of the lower input costs, ensuing certain level of locked-in profits.

RELATED TERMS
  1. Downstream

    The oil and gas operations that take place after the production ...
  2. Oil Price to Natural Gas Ratio

    A mathematical ratio comparing the prices of crude oil and natural ...
  3. Natural Gas Equivalent

    The amount of energy used by the burning of natural gas versus ...
  4. Natural Gas ETF

    Exchange-traded funds (ETFs) that invest in natural gas futures ...
  5. Horizontal Integration

    The acquisition of additional business activities that are at ...
  6. Production Per Share

    A mathematical ratio used in the oil and gas industry to refer ...
Related Articles
  1. Markets

    Key Ratios For Analyzing Oil And Gas Stocks

    Oil and gas investors need to focus on a different subset of ratios to analyze the growth and profitability of these companies.
  2. Markets

    Key Ratios For Analyzing Oil And Gas Stocks: Introduction

    Oil and gas exploration and production (E&P) companies are unique from a valuation standpoint. Because of this, investors need to focus on a different subset of ratios to analyze the growth and ...
  3. Markets

    Upstream And Downstream Oil And Gas Operations

    Upstream and downstream are business terms that refer to a company’s location in the supply chain. The closer to the end user a function or firm is, the further downstream it is.
  4. Markets

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
  5. ETFs & Mutual Funds

    VGENX: Vanguard Energy Fund Top 5 Holdings Analysis

    Discover an analysis of the top five holdings in the Vanguard Energy Fund Investor Shares, and learn about their characteristics and year-to-date performance.
  6. Markets

    Do Oil and Natural Gas Prices Rise And Fall Together?

    Do the prices of crude oil and natural gas affect each other? Investopedia explores price patterns and provides analysis.
  7. Markets

    The World's Top 10 Natural Gas Companies (XOM, OGZPY)

    Read about the 10 companies that combined to produce about 105 billion cubic feet of natural gas in 2014, about 30% of the world's total production.
  8. Markets

    Guide To Measuring Oil And Gas Companies

    Here are some important stats to look for when measuring oil and gas companies.
  9. ETFs & Mutual Funds

    A Look Inside The Natural Gas Pipeline

    The United States is the Saudi Arabia of natural gas, but natural gas stocks were a mixed bag last year.
  10. Markets

    Projected Gas Prices for 2016

    Learn what major authorities on gas prices are predicting for 2016, and about the different factors that can impact the price of gas.
RELATED FAQS
  1. What are average operating expenses for the oil and gas sector?

    Learn about the average operating expenses and average operating expenses margin for the oil and gas sector and how they ... Read Answer >>
  2. What is the difference between upstream and downstream oil and gas operations?

    Learn about the oil and gas supply chain. Learn why exploration, production, and drilling are considered upstream, while ... Read Answer >>
  3. What percentage of the global economy is comprised of the oil & gas drilling sector?

    Read about a rising industry that already composes as much as one-twentieth of total global economic output: the oil & gas ... Read Answer >>
  4. What is the average growth rate of the oil & gas drilling sector?

    Learn about the growth rate in the critically important market sector of oil and gas exploration and production, and see ... Read Answer >>
  5. What are the main benchmarks that track the oil & gas drilling sector?

    Read about several different types of benchmarks that investors can use to track the overall performance of the oil and gas ... Read Answer >>
  6. What economic indicators are important to consider when investing in the oil and ...

    Find out more about economic indicators and which ones are important when investing in companies in the oil and gas sector. Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center