Lower Realized Prices Will Zap Chevron’s Results

Chevron Corp. (NYSE:CVX) is scheduled to report its third quarter earnings on November 2. The California based integrated energy firm provided an interim update on its performance this quarter in early October in which it indicated that it expects earnings to be lower this quarter relative to the previous one. We believe that upstream revenues and profits will be lower this quarter on a y-o-y basis, reflecting a combination of lower energy prices and unscheduled production halts while downstream performance will depend on the offsetting effects of higher refining margins and lower refinery throughput.

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Lower upstream revenues and profits

Chevron will feel the impact of lower energy prices once again this quarter, especially in the US, where natural gas prices remain near the low levels seen during the first half of the year. International prices are also at lower levels on a y-o-y basis, reflecting the global slowdown in economic growth. China’s slowdown has been a major factor in this – EIA projects the country’s oil consumption growth rate to be around 3.6% this year, its lowest since 2001. ^[1]

Upstream production figures have not been too positive either, with unscheduled halts in the US due to Hurricane Isaac causing a slight dip in production during the first two months of the quarter. International production was lower as well, primarily due to scheduled maintenance in Kazakhstan and the UK.

Worldwide net production during the previous year averaged around 2.7 million barrels of oil-equivalent (boe) per day in 2011. During the first half of this year, net production averaged around 2.63 million barrels per day, over 2% lower than net production in the previous year. This was attributed to normal field declines and the shut-in of the Frade field in Brazil. Although the ban in Brazil has been temporarily overturned, other events such as the Hurricanes Isaac and Sandy could impact production figures during the second half. As a result, we expect net oil-equivalent production this year to be lower than in 2011. Long term however, we project strong growth in net production, driven by international projects to produce natural gas from shale resources.

Strong refining margins could be offset by refinery shutdowns

There has been a substantial increase in worldwide refining margins over the past few quarters. This can be attributed to a combination of lower cost feedstocks and low global inventories of gasoline and diesel, which has resulted in higher fuel prices. We expect this to have a positive impact on downstream revenues and profits this quarter.

Refining margins this quarter have been unusually high, and they are expected to decline next quarter onwards. Long term, we expect downstream EBITDA margins to reach around 5%. We believe that downstream margins can be sustained at such a level going forward based on Chevron’s plans to restructure and trim down its refineries due to overcapacity and declining utilization rates.

On the other hand, a refinery shutdown at Richmond, California due to a fire in early August and a disruption at the Pascagoula, Mississippi refinery due to Hurricane Isaac led to a decline in US refinery input volumes. This could offset the impact of higher refining margins this quarter.

We currently have a Trefis price estimate of $115 for Chevron, which around 5% above the market price.

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1. SHORT-TERM ENERGY AND WINTER FUELS OUTLOOK, EIA, October 2012 [↩]