Chevron Expects First Quarter Earnings To Decline On Lower Production, Thinner Margins

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Chevron (NYSE:CVX) released an interim update this Wednesday to give a sense of its 2014 first quarter earnings, which would be announced on May 2, based on operating results of the first two months of the quarter. The company expects its first quarter earnings to be lower compared to the same period last year due to lower production, thinner margins, foreign-currency fluctuations, and impairment charges related to its mining operations. However, earnings adjusted for non-operating items are expected to be at par with its 2013 fourth quarter results, when it reported a net income of $2.57 per share. [1]

California-based Chevron Corporation is the second largest energy company in the U.S. after Exxon Mobil. The company manages its investments in subsidiaries and affiliates, for which it provides administrative, financial, management and technological support.  This extends both to its U.S. subsidiaries, and to its international subsidiaries engaged in fully integrated petroleum, chemicals and mining operations, as well as power generation and energy services.

We currently have a $122 price estimate for Chevron, which is almost in line with its current market price.

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See Our Complete Analysis of Chevron

Lower Upstream Production: Chevron’s average daily hydrocarbon production during the first two months of the quarter was ~2.5% lower compared to the first quarter last year. The company attributes this decline to the downtime at its production sites in the U.S. due to the bitterly cold weather during the period. It produced crude oil and natural gas at an average rate of 637 thousand barrels of oil equivalent per day (MBOED) in the U.S., down 4.1% from last year. The company’s international production was also impacted by bad weather in Canada and Kazakhstan. However, its was partially offset by the ongoing ramp-up at its Angola LNG project. (See: A Closer Look At Chevron’s Angola LNG Project)

Going forward, we expect Chevron’s average daily hydrocarbon production for the full year to be relatively flat year-on-year, as production growth from new projects started recently and the ones slated to come online during the year would be mostly offset by normal field declines. (See: A Look At Chevron’s Key Deepwater Projects)

Thinner Upstream Cash Margins: Chevron’s upstream cash margin per barrel of oil equivalent (BOE) is also expected to decline during the first quarter, primarily due to lower average price realizations. Lower benchmark crude oil prices led to a 4% y-o-y decline in the company’s liquids price realizations. However, higher natural gas prices in the U.S. due to a sharp draw down in inventories during the extremely cold winter season this year partially offset the impact of lower crude oil prices. According to our estimates, a 1% decline in average price realization shrinks the company’s adjusted upstream cash margin per BOE by ~0.85%. [2] We therefore expect Chevron’s first quarter upstream cash margins to decline by ~2% year-on-year.

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Notes:
  1. Chevron Issues Interim Update for First Quarter 2014, chevron.com []
  2. Chevron Corporation’s 2014 Security Analyst Meeting, chevron.com []