Chevron Q4 Earnings: Poor Price Realizations Overshadow Upstream Production Growth, Company Continues To Focus On Cost Cutting

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Chevron (NYSE:CVX) released its 2015 fourth quarter and full year earnings report recently. [1] The company has been hit hard by the current downtrend of low crude oil prices and its average price realizations in both upstream and downstream segments have suffered as a result. However, Chevron remains confident of its short to medium term upstream production growth outlook. The company believes that it can increase its average daily hydrocarbon production rate to 2.9-3.0 million barrels of oil equivalent per day (MMBOED) by 2017 and expects key projects such as Gorgon, Wheatstone, and Angola LNG to provide the majority of volume growth. Chevron is also taking measures to reduce its capital spending and overall cost structure in order to be able to better steer through this commodity trough. We believe that these measures will be beneficial in lifting the company’s cash profit margins as oil prices recover gradually in the long run.

Our price target for Chevron stands at $98, implying a premium more than 10% to the market.

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Average Realizations Batter 2015 Results, But Upstream Production Growth Outlook Promising

Oil prices continued to wreak havoc on Chevron’s upstream operations throughout 2015. Chevron’s average liquids realizations for the full year amounted to $43 domestically (down 35% y-o-y) and $47 internationally (down 32% y-o-y). [2] Resultantly, the company’s 2015 full year earnings fell 76% y-o-y, with the loss due to realizations emerging as the single largest contributor to the massive decline. Chevron’s Q4 performance was its worst performance in a 3-month period in more than a decade, as it registered its first quarterly loss since 2002. Brent crude oil spot price averaged close to $52 for the full year 2015, and is currently hovering around the $35 mark. The abundant supply of oil coupled with slower demand growth essentially means that the low energy price environment will continue to persist in the near term.

The silver lining for Chevron in 2015 was the fact that the company managed to grow its hydrocarbon production by 2% to 2.62 MMBOED (Million Barrels Oil Equivalent per Day). [3] Chevron remains confident of its short to medium term upstream production growth outlook, citing progress on the key projects that are expected to drive its average daily hydrocarbon production rate from around 2.6 MMBOED currently to 2.9-3.0 MMBOED by 2017. [4]  Although Chevron’s total oil equivalent hydrocarbon production rate has remained relatively flat around 2.6 million barrels per day since 2006, the short to medium term prospects of the company’s upstream division look bright. This is because projects such as Lianzi, Moho Nord, Chuandongbei, etc. have recently come online and the company is making some good progress on the key growth projects such as Gorgon, Wheatstone, and Angola LNG. [3] These projects are collectively expected to provide the majority of Chevron’s volume growth. The company plans to ship the first cargo from the Gorgon LNG project, which forms the centerpiece of its production ramp-up plan, in Q1 2016. [5] Additionally, Chevron expects first cargo from its other major project, Wheatstone, by mid-2017.

Chevron Focusing On Cost Cutting In Low Oil Price Environment

Chevron’s capital expenditures have soared in the past few years and amounted to $40.3 billion in 2014. [2] Most of the incremental capital expenditures have gone into the development of deepwater hydrocarbon reserves and the construction of giant liquefied natural gas (LNG) plants in Australia, where cost structures have elevated significantly over the past few years due to rising labor costs. For instance, the gross cost estimate for the Gorgon LNG project has risen by more than 45% since 2009, and stood at $54 billion in 2015. [6] However, the decline in global crude oil prices has forced Chevron to increase its focus on optimizing both capital and operational costs in order to maximize its return in the current commodity down cycle. Resultantly, the company’s capital expenditure for 2015 amounted to $34 billion, a 16% reduction over the prior year. [2] Chevron plans to continue reducing its capital expenditures during the next few years and hopes to bring down the full year capex to below $27 billion this year and to $20-24 billion by 2018 depending on business conditions. [4] [5] The company is also actively seeking to divest its non-core assets. Chevron has already completed $11.5 billion in divestments as of Q4 2015, and expects additional divestments worth $5-10 billion by 2017. [3] Additionally, the company is working towards a more efficient cost structure and plans to lay off 6,000 to 7,000 employees and a similar number of contractors. Cost cutting has been a prevalent theme for all major integrated oil companies in the current scenario, and we believe that such measures will be beneficial in lifting Chevron’s cash profit margins once oil prices start recovering in the long run.

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Notes:
  1. 4Q 2015 Chevron Earnings Conference Call, January 29, 2015, Chevron Investor Relations []
  2. Chevron’s SEC Filings [] [] []
  3. 2015 4Q Earnings Conference Call Presentation, January 29, 2016, Chevron Investor Relations [] [] []
  4. Chevron (CVX) John S. Watson on Q3 2015 Results – Earnings Call Transcript, October 30, 2015, Seeking Alpha [] []
  5. Chevron (CVX) John S. Watson on Q4 2015 Results – Earnings Call Transcript, January 29, 2016, Seeking Alpha [] []
  6. More delays for Chevron’s $74bn Gorgon project, August 3, 2015, The Australian []