Chevron Gains On Improved Refining Margins And Asset Exchange

by Trefis Team
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CVX
Chevron
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Chevron (NYSE:CVX) announced its Q4 2012 financial results on February 1, posting solid growth in net earnings and allaying investor concerns after a disastrous Q3 2012 performance. Chevron had an eventful Q3 2012 with several accidents and disasters that marked an impact on the company’ production. Net earnings fell by 33% compared to the same quarter in 2011. Things were back to normal, however, in the last three months of the fiscal year as a revival in upstream production and a marked improvement in downstream margins helped boost net profit by 41% over Q4 2011.

The company’s earnings also received a huge billion-dollar boost on an Australian asset exchange. Chevron’s general operational revival would have made a much bigger impact had the global prices for oil and oil products been as strong as last year’s. Continuing with the trend seen through 2012, however, energy demand remained weak, particularly in the United States, offsetting much of the production gains realized in the last quarter.

Upstream Earnings Rise By 20% Driven By One-Time Asset Exchange, While Lower Prices Offset Production Growth

Chevron’s upstream earnings for Q4 2012 stood at around $6.8 billion compared to $5.7 billion a year ago – mostly a result of a $1.4 billion gain on an asset exchange in Australia. The company’s upstream production improved marginally – worldwide net oil-equivalent production was 2.67 million barrels per day in Q4 2012, up from 2.64 million barrels per day in Q4 2011. Weaker pricing for oils and natural gas liquids (NGLs), however, limited the company’s ability to turn the volume gains into net profit.

The flagging demand for energy was the most pronounced in the US, where Chevron realized average sales prices of just $91 per barrel on crude oil and NGLs in Q4 2012, down from $101 a year ago. As a result despite a 2% increase in production in the region, net earnings from upstream activities in the US were down by 15%.

The international operations also showed marginal gains in production – upstream volumes in Q4 2012 stood at 1.99 million barrels of oil equivalent per day, an increase of just under 1%. Pricing however was much stronger in the international arena with Chevron realizing a sales price of $100 per barrel on oils and NGLs compared with $101 a year earlier. With natural gas prices also rising by nearly 7% internationally, the company’s net earnings increased by more than 30% in Q4 2012 to reach $5.4 billion.

Downstream Margins Recover, Boost Profits

Following a quarter of surprisingly low refining margins in Q3 2012, Chevron’s downstream margins were finally up in Q4 2012, leading to higher profits despite a decline in demand. In the US, the company saw slower volume sales of  key products such as gasoline, gas oil and kerosene. Despite this, the company’s downstream operations in the US posted earnings of $331 million, up from a loss of about $200 million in Q4 2011. Earnings from international downstream operations meanwhile increased by more than four-fold over Q4 2011, finishing just below the $600 million mark.

Outlook Remains Strong For Chevron

Keeping Chevron’s Q4 results in mind, we believe investors should now have ample reason to believe in the company’s ability to keep raising its overall output levels in the near future, particularly in upstream operations. Chevron gained exploration acreage in five new countries over 2012 and also made significant acreage expansion in the US. Its focus on non-conventional gas and oil  is also drawing it deeper into Canadian borders as the company announced the acquisition of a 50 percent operated interest in a western Canada LNG project.

Assuming that the global economic environment, which played spoilsport over the entire fiscal year by keeping prices low, begins to improve gradually over the next few years, we should once again see a resurgence in energy prices, boosting Chevron’s top-line.

The bottom line  is that Chevron’s  investors should look forward to stronger performances from the company in the next few years.

We currently have a Trefis price estimate of $119 for Chevron, which we will  revise soon based on the latest results.

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