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

Chevron (NYSE:CVX) is scheduled to announce its 2014 first quarter earnings on May 2. We expect 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.

Natural gas prices in the U.S. were significantly higher during the first quarter because of an unusually cold winter, which forced consumers to use more heat and electricity. Spot henry hub prices were up more than 45% y-o-y due to a precipitous decline in natural gas inventories in the domestic market. However, it would not have a huge impact on Chevron’s consolidated earnings per share, as U.S. natural gas contributes just around 8% to the company’s total oil-equivalent production.

During the first quarter earnings call, we will be looking for an update on the company’s ongoing new project development, specifically the Gorgon liquefied natural gas (LNG) project in Australia, the Angola LNG project and the ongoing Deepwater projects in the Gulf of Mexico and offshore of Brazil.

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

See Our Complete Analysis For Chevron

Lower Production, Thinner Margins

Chevron’s average daily hydrocarbon production during the first quarter is expected to decline in comparison to the same period last year, primarily due to higher than average downtime at its production sites in the U.S. because of bitterly cold weather. Its hydrocarbon production declined by ~2.5% y-o-y during the first two months of the quarter. Most of the decline came from the U.S., where it produced at an average rate of 637 thousand barrels of oil equivalent per day (MBOED), down 4.1% from last year. Chevron’s international production would also be impacted by bad weather in Canada and Kazakhstan. However, it would be partially offset by the ongoing ramp-up at its Angola LNG project. ^[1]

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: Chevron Revised To $120 On Slower Production Growth, Thinner 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 are expected to lead to a 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 could 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]

Updates On New Project Development

Chevron expects to boost its total upstream production by ~20% to 3,100 MBOED by 2017 from around 2,597 MBOED last year. The Gorgon LNG project forms the centerpiece of this aggressive production ramp-up plan, as it is expected to contribute over 200 MBOED to Chevron’s net production volume. ^[3] However, cost overruns and start-up delays weigh on the potential rate of return from the Gorgon Project. In 2011, Chevron announced a sharp $15 billion or a 40% spike in the total cost estimate for the project from $37 billion in 2009 to $52 billion. Last year, it further increased the total cost estimate by another $2 billion. ^[4] The estimates have gone up primarily due to rising labor costs, a stronger Australian dollar, productivity issues at the Barrow Island site, and weather delays. During the first quarter earnings call, we will be looking forward to an update on the Gorgon LNG project.

Apart from this, we will also be looking forward to an update on the $10 billion Angola LNG project, which reported its first shipment early last year. However, the LNG plant is currently operating well below of its full capacity due to some technical issues on the supply side. Chevron, which holds a 36.4% operating stake in the project, noted in its latest annual SEC filing that the project would be operating at around 50% of its peak capacity till next year, when it expects to complete the required modifications to fix these technical issues. (See: A Closer Look At Chevron’s Angola LNG Project)

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1. Chevron Issues Interim Update for First Quarter 2014, chevron.com [↩]
2. Chevron Corporation’s 2014 Security Analyst Meeting, chevron.com [↩]
3. Chevron Reaffirms 2017 Production Target, Highlights Future Growth, chevron.com [↩]
4. Chevron Announces $39.8 Billion Capital and Exploratory Budget for 2014, chevron.com [↩]