Chevron Earnings Preview: What We’re Watching
Energy major Chevron (NYSE:CVX) will come out with its Q3 results on the 28th of this month following the earnings release of BP (NYSE:BP). In an interim update the company indicated that its results would be largely in line with the results of the previous quarter with upstream earnings being lower because of lower oil prices. [1] Oil prices in Q3 2011 were higher compared to prices a year ago but fell in comparison to the previous quarter. The interim results also indicated that international as well as local U.S. oil and gas production had declined slightly in the first 2 months of the latest quarter. Chevron is placing bets on the growth of energy demand in Asia to drive its future growth.
We have a $104 price estimate for Chevron which is roughly in line with its current market price.
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Upstream Earnings Could Fall
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According to data released by the Chevron, average realizations per barrel of crude in the U.S. fell from $109 in Q2 2011 to $101 in the first two months of Q3. [1] The fall in prices for liquids in international markets was less steep declining from $107 to $103. Gas prices declined slightly in the U.S while rising in international markets in the same period. Production declined in the U.S. in these months because of maintenance activity in the U.S. Gulf of Mexico. The total production of oil and gas dropped slightly in this period as well. We expect these factors to weigh in on the sequential growth of upstream earnings.
In the long term we expect the international output of Chevron to grow as the company pushes ahead with its multi-billion dollar projects in Australia where the company has the $37 billion Gorgon LNG project and the $29 billion Wheatstone project in pipeline to meet the growing demand for LNG from Asian markets. Chevron holds more than half of its 150 Trillion cubic feet of gas in reserves in the Asia Pacific region. (See: Chevron’s $29 Billion Australian LNG Project is a Big Bet on Asian Demand) The company is also beginning exploration off the Chinese coast for gas exploration. [2]
Downstream Earnings and Currency Effects
Downstream results were more mixed in the first two months of Q3. Refinery output in the U.S. increased in the period while output from international refineries declined. Refining margins fell in the period in comparison to the previous quarter. However, downstream results are expected to be buoyed by a $500 million gain on sale of assets in the U.K. and Ireland. The company also indicated that it would benefit from non-cash currency effects as the USD rose against other major currencies in the period.
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Notes:- CHEVRON ISSUES INTERIM UPDATE FOR THIRD QUARTER 2011, Chevron [↩] [↩]
- Chevron Drilling Off South China Coast by Year-End, The Wall Street Journal [↩]