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.

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