Chevron (NYSE:CVX) released its interim 2nd quarter results, reporting that it was expecting a sequential rise in earnings because of a sharp increase in U.S. refining margins.  Higher downstream earnings are expected to compensate for lower commodity prices that could depress earnings from the upstream division. Chevron managed to increase its oil as well as natural gas output in North America but posted a drop in international output, mainly because of loss of output from the Frade fields in Brazil.
We are revising our $110 price estimate for Chevron, which is at a 5% premium to its current market price.
Over the past quarter oil prices and natural gas prices in the U.S. have seen a sharp drop, lowering the profitability of upstream operations. Chevron’s average realization from natural gas sales in the U.S. dropped from $2.48 /Million cubic feet (Mcf) in Q1 2012 to 2.05 / Mcf in Q2 through May. 
The company’s realizations from crude oil sales in the U.S. however rose slightly higher in Q2 despite a drop in benchmark crude prices in the same period. Chevron also increased its crude oil output in Q2 by about 2% because of higher production in the Gulf of Mexico and increased its natural gas production in the U.S. despite low prices. The company’s international crude output fell by 2.5% in the period but overall drop in output was tempered by higher natural gas production.
Downstream margins in the U.S. rose sharply for the company over the last quarter. Refining and marketing margins increased in the U.S. but declined in international markets in Q2 over the previous quarter.  Chevron’s downstream division will also be propped up by about $200 million in gains from asset sales in the period. Refining volumes decreased slightly in the U.S., but increased sharply in international markets because of completion of maintenance activity in some facilities.Notes: