Total returns for integrated companies are reduced by the relatively poorer downstream performance, and companies could release value to shareholders by spinning off or divesting those activities with limited integration value.
On average over the last twelve years, non-integrated or independent/pure-play companies have generally delivered better returns than their larger, integrated competitors and they have generally shown higher valuation metrics.
Investors have tended to believe that 'specialist' companies, particularly upstream-focused ones, are likely to have a greater potential to create shareholder value than do integrated ones.
Comparing valuation metrics (Enterprise Value in relation to Operating EBITDA) for two peer groups — the IHS Herold, Inc. group of 35 global integrated companies and the Herold group of the 45 largest international non-integrated companies, including independent E&P companies as well as independent refiners, marketing and transportation companies — shows generally higher valuations for the non-integrated companies in most years, particularly so in recent years with the sharply higher oil prices.
Peer group valuations: 2000 – 2011
(median values)
Source: Ernst & Young calculations from IHS Herold data
Similarly, comparing Total Shareholder Returns for these two peer groups shows the sharp year-to-year volatility of returns, but on average, the non-integrated companies performed slightly better than the integrated companies.
Peer group returns: 2000 – 2011
(median values)
Source: Ernst & Young calculations from IHS Herold data
These trends are broadly supported by data from analysts at Deutsche Bank Research for their group of 14 “global integrated oils.” The Deutsche Bank data show the significant differences in annual Returns on Average Capital Employed (ROACE) in the upstream and downstream segments.
Total returns for integrated companies are therefore reduced by the relatively poorer downstream performance, and thus by implication, the companies could release value to shareholders by spinning off or divesting those activities with limited integration value.
Annual returns on average capital employed
(Global Integrated Oils)
Source: Ernst & Young calculations from Deutsche Bank Research data
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