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Looking Downstream For Opportunity

The dramatic fall in oil prices that we have witnessed over the last four months has dragged almost all energy related stocks with it. This is hardly surprising as the price of crude is still the benchmark by which energy prices are set. In the case of many exploration and production (E&P) companies the drop in prices has an obvious effect on revenues and profitability, but in some cases stock in companies not directly affected has been hit just as hard and this results in opportunities for investors.

The oil and gas industry is usually split into three sectors, upstream, midstream and downstream. As the names would imply, upstream refers to companies that build and operate wells that extract the commodities, midstream refers mainly to the transportation of that oil and gas to terminals and refineries, and downstream operations are what happens when it gets there; the refining and processing of crude oil and natural gas as well as the marketing and distribution of the related products. In general terms the further you get from production, the less the impact of falling oil prices. They can still hurt for sure, but not as much.

Taking this one step further, if you look at suppliers to the downstream sector they are even less damaged by low crude prices. In fact, in certain cases where fuel is a cost as well as a product, the effects of lower commodity prices are partly offset by lower fuel costs. It would be logical then if a supplier to downstream companies,…

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