Chevron Q4 Preview: Low Oil Prices Will Lead To Declining Earnings & Spending Cuts, But Positive Updates On Key Projects Could Be Silver Lining

+6.18%
Upside
158
Market
167
Trefis
CVX: Chevron logo
CVX
Chevron

Chevron (NYSE:CVX) is scheduled to announce its 2015 fourth-quarter earnings on January 29th. [1] We expect lower crude oil prices to weigh significantly on the company’s revenues and earnings. Benchmark crude oil prices were down sharply last year due to rising supplies coupled with slower demand growth. Brent crude oil spot price averaged less than $45 for the quarter in question and close to $52 for the full year 2015. Chevron has taken steps to maintain adequate cash flow in the wake of low earnings by cutting down on its capital spending and we believe that the company will continue to do so in the near term. During the earnings conference call, we will be looking for any further updates on the company’s operating strategy under the changed crude oil price environment. Additionally, we also expect a positive update on Chevron’s ongoing new project development, specifically the Gorgon liquefied natural gas (LNG) project in Australia that is expected to come online in the first quarter of 2016.

Our price target for Chevron stands at $98, implying a premium of 15% to the market.

See Our Complete Analysis For Chevron

Relevant Articles
  1. Down 18% Since 2023, How Will CVX Stock Trend Post Q4 Results?
  2. Down 13% This Year Will Chevron Stock Rebound After Its Q3?
  3. What To Expect From Chevron’s Stock Post Q2?
  4. Chevron Stock Down 13% Over Six Months, What’s Next?
  5. Chevron’s Q4 Earnings: What Are We Watching?
  6. What’s Next For Chevron’s Stock?

Chevron Will Continue To Curb Capital Spending In Near Term

Oil & Gas companies across the globe are choosing to curtail capital expenditures in the wake of declining earnings, even though it might mean a loss of growth in future production. In keeping with this trend, Chevron announced last month that it has revised its estimates for the company’s capital and exploratory investment program for 2016. The company now plans to spend $26.6 billion “to complete and ramp-up projects under construction, fund high return, short-cycle investments, preserve options for viable long-cycle projects, and ensure safe, reliable operations,” according to Chairman and CEO John Watson. [2] The 2016 budget is 24% lower than what Chevron likely spent in 2015. In the past few years, the company’s total capital and exploratory expenditures have soared from around $22 billion in 2010 to over $40 billion in 2014. [3] However, the decline in global crude oil prices has forced the company to increase its focus on optimizing both capital and operational costs in order to maximize its return in the current commodity down cycle. In addition to revising 2016 targets, Chevron reduced its capital spending in 2015 itself. Capital expenditure for the first nine months of 2015 amounted to $25.0 billion, a 13% reduction over the prior year period. [3] Chevron plans to continue reducing its capital expenditures during the next few years and hopes to bring down the full year capex to $20-24 billion by 2018 depending on business conditions. [4]

Expect Positive Updates On Chevron’s New Project Development

Chevron has been making some good progress on the key growth projects in western Australia, such as Gorgon and Wheatstone. These projects, along with the Angola LNG project, are collectively expected to provide the majority of Chevron’s volume growth in the coming years, which the company management believes will boost average daily hydrocarbon production rate from around 2.6 MMBOED (Million Barrels of Oil Equivalents per Day) currently to 2.9-3.0 MMBOED by 2017. [4] We are expecting a positive update on the progress of these projects, especially on the Gorgon LNG project, which forms the centerpiece of Chevron’s production ramp-up plan. The company plans to ship the first cargo from Gorgon in the first quarter of 2016. [5] The project is expected to cater to the strong LNG demand in China. Chevron is already making a push in this regard and has signed two major deals in the last month or so which involve the company exporting LNG to China. Chevron recently announced that it has signed an agreement with ENN LNG Trading Company Limited where Chevron will deliver up to 0.5 million metric tons per annum (MTPA) of LNG over 10 years, with deliveries expected to start from 2018. [6] The company had also signed an agreement late last month to sell as much as 1 million tons per year of LNG to China Huadian Green Energy. [7]

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap

More Trefis Research

Notes:
  1. Chevron Fourth Quarter 2015 Earnings Conference Call, January 07, 2016, Chevron Press Release []
  2. Chevron Announces $26.6 Billion Capital and Exploratory Budget for 2016, December 09, 2015, Chevron Press Release []
  3. Chevron’s SEC Filings [] []
  4. Chevron (CVX) John S. Watson on Q3 2015 Results – Earnings Call Transcript, October 30, 2015, Seeking Alpha [] []
  5. Chevron readies first LNG cargo from Australian mega project, January 15, 2016, Reuters []
  6. Chevron and ENN Sign Gorgon LNG Agreement, January 18, 2016, Business Wire []
  7. Chevron and China Huadian Sign Heads of Agreement for Long Term LNG Supply, December 21, 2015, Business Wire []