Chevron (NYSE:CVX) is scheduled to announce its 2014 second quarter earnings on August 1. We expect higher commodity prices to primarily drive earnings growth for the company amid relatively flat to lower upstream production and lower refinery throughput. The average Europe Brent crude oil price was up by around 7% year-on-year during the second quarter and will positively impact the company’s crude oil revenues. On the other hand spot Henry Hub prices were up more than 15% y-o-y during the second quarter, primarily due to lower natural gas inventories compared to last year. This could be attributed to the unusually cold winter in the U.S., which forced consumers to use more heat and electricity this year. Since just around 24% of the total natural gas produced by Chevron comes from the U.S., higher Henry Hub gas prices are not expected to boost the company’s upstream earnings significantly.
During the second quarter earnings call, we will be looking for an update on Chevron’s ongoing new project development, specifically the Gorgon liquefied natural gas (LNG) project in Australia and the deepwater projects in the Gulf of Mexico and offshore of Brazil. We will also be looking for an update on the Angola LNG project, which is currently shutdown due to technical issues.
California-based Chevron (NYSE:CVX) 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. It generates annual sales revenue of around $230 billion with a consolidated adjusted EBITDA margin of ~21.8%.
We currently have a $128 price estimate for Chevron, which is almost 12x our 2014 full-year GAAP diluted EPS estimate for the company.
Flat Upstream Production
Chevron’s second quarter upstream production rate is expected to be slightly lower, compared to last year, as increased liquids production from tight plays in the U.S. and Argentina would be mostly offset by lower production from Angola and Kazakhstan.
We expect Chevron to continue to make good progress on its shale and tight resources development program. The company has an active drilling and development program in the Permian Basin with 25 active rigs that had already drilled over 120 wells by the end of the first quarter. The development of shale and tight resources drove Chevron’s first quarter net hydrocarbon production higher by 37,000 barrels of oil equivalent per day. In addition to this, we also expect continued production ramp up at the Papa-Terra project offshore Brazil, which started producing oil November last year, to boost Chevron’s net upstream volumes during the second quarter. 
However, the decline in base production, and the shutdown of the Angola LNG project due to technical issues is expected to more than offset the company’s second quarter production growth from new projects. Chevron’s $10 billion Angola LNG project has been plagued with several issues since its startup last year due to a series of technical faults including electrical fires, pipeline leaks, and slower than expected ramp-up of the downstream processing facility. In its latest annual SEC filing, the company noted that the project would be operating at around 50% of its peak capacity till 2015, when it expects to complete the required modifications to fix these technical issues.  However, the plant has been offline since April this year due to a pipeline rupture and Chevron now expects it to restart only around mid-2015. Chevron holds a 36.4 per cent share in the project. 
According to the interim update provide by Chevron, its upstream production during the first two months of the second quarter was around 0.6% below the full 2013 second quarter average production rate. 
Key Project Updates
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. 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. 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 second quarter earnings call, we will be looking forward to an update on the Gorgon LNG project, which was 80% complete at the end of the first quarter and is expected to come online by mid-next year. 
We will also be looking for an update on the Jack/St. Malo deepwater project, which is being developed at a cost of over $7.5 billion. Chevron holds a 50% operating interest in the Jack field, while Maersk and Statoil hold 25% each. The company is also the operator of the St Malo field with a 51% interest. Other partners in the St Malo field include Petrobras (25%), Statoil (21.50%), ExxonMobil (1.25%) and ENI (1.25%). Production from the development of Jack and St. Malo fields is expected to ramp up to around 97.5 MBOED at its peak. During the first quarter earnings call, Chevron noted that the project is on budget and on-track for a late fourth quarter startup this year. 
*MBOED: Thousand barrels of oil equivalent per dayNotes:
- 2014 1Q Earnings Conference Call Presentation, chevron.com [↩] [↩] [↩]
- Chevron Annual SEC Filings, sec.gov [↩]
- Angola LNG Outlines Plan To Address Issues At The Plant, angolalng.com [↩]
- Chevron Issues Interim Update for Second Quarter 2014, chevron.com [↩]