Solid Chevron Earnings Expected On Oil Prices, Refining Margins

CVX: Chevron logo

Chevron (NYSE:CVX) will report Q1 earnings Friday, and we expect results to be in line with its interim update, which forecast a jump in earnings because of higher oil prices and a rebound in refining margins. Oil prices rose last quarter because of tightening sanctions against Iran and improvements in the economic outlook in the U.S. Upstream earnings were slightly tempered by low natural gas prices in the U.S. Downstream earnings will also show an improvement because of higher refining volumes. Rival ConocoPhillips (NYSE:COP) reported a drop in quarterly earnings earlier this week because of a fall in output. We have a $109 price estimate for Chevron, which is at a 5% premium to its current market price.

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Upstream earnings

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Overall, upstream earnings are expected to remain robust because of high oil prices. Although Chevron’s production volumes showed a slight decline according to its interim earnings, the impact will be offset by higher commodity prices. Oil output in the U.S. showed a slight increase, rising to 450 MBD from 447 MBD in Q4 2011. (See: Chevron’s Interim Q1 Report Shows Higher Profit On Oil Prices; Refining Margins Improve)

International output fell in the same period, partially because of the suspension of operations in the Frade deepwater fields in Brazil. The impact of the suspension will be more pronounced in Q2 this year as the company will loose close to 33,000 barrels of daily production as the fields are closed for safety inspections.

Results will be slightly impacted by the low gas prices in the U.S. The company’s realizations from natural gas fell by almost 25% in the North American region in Q1, as the mild winter exacerbated the oversupply situation. Internationally, natural gas prices showed a rise in the last quarter. The company’s earnings will also be pushed up because of lower operational expenses.


Downstream earnings are set to rebound in Q1 because of improving margins as well as higher refinery volumes. The last quarter saw an improvement in refining margins as excess capacity went offline early last quarter in response to high retail gasoline prices impacting demand. Chevron will also book $200 million in Q1 profits in relation to an asset sale in Spain in the period.

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