Chevron: Price Estimate Revised to $109 as Oil Prices, Refinery Sales Drive Profits

Chevron (NYSE:CVX) reported a solid Q3  late last week as results were boosted by strong oil prices and refining margins, gains on asset sales and positive foreign exchange effects. ^[1] Despite liquids production output falling by 5% in Q32011 from the prior year period, Chevron’s upstream earnings rose from $3.6 billion last year to $6.2 billion as its realization on liquids sales remained above $100. On the downside, the company announced that it would have to increase its capital expenditures for next year which will impact the company’s cash payout. ^[2] Competitors Exxon Mobil (NYSE:XOM) and ConocoPhillips (NYSE:COP) have also posted similar results.

We have revised our price estimate for Chevron from $104 to $109, about 6% ahead of the current market price, to reflect these results as well as some changes in our outlook which we outline below.

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Prices drive upstream growth

Chevron’s upstream earnings increased 70% over the year ago period driven by high price realizations both in the U.S. and in international markets. ^[1] High oil prices more than offset the company’s 5% output decline which was attributed to field declines, maintenance downtime and the impact of high crude prices on production volumes because of variable royalty contracts that reduce the operator’s share of the output as oil prices rise. However the company saw new production stemming from project ramp-ups in Canada, the U.S. and Brazil and the acquisition of Atlas Energy. ^[1] Despite the industry-wide drop in production volumes, Chevron maintained that it would look to boost overall output by 1% per annum over the next 2 years and by 4-5% from 2014-17. ^[2] A large part of this new production is expected to come from its multi-billion dollar Gorgon and Wheatstone projects in western Australia. Gorgon is expected to start production by 2014.

Chevron will also be a participating in the North Sea Claire Ridge project that was approved in the U.K. a few weeks ago. These exploration and production efforts are expected to be the primary causes of the increase in capital expenditures for 2012.

Downstream gains on margins

Chevron’s downstream results were boosted by high margins in the U.S., where it doubled its earnings over the same period last quarter. ^[1] International results were boosted by the sale of its Pembroke Refinery and related assets in the U.K. as well as favorable foreign currency gains.  Total refined product sales declined in the period, reflecting divestment activity and lower gas oil, kerosene and  gasoline sales.

Our revised estimates for Chevron take into account the near-term changes in the price realization for oil and natural gas, as well as management’s planned increase in production volumes and the higher capex over the next few years.

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1. CHEVRON REPORTS THIRD QUARTER NET INCOME OF $7.8 BILLION, Chevron [↩] [↩] [↩] [↩]
2. Profit at Chevron Doubles, WSJ [↩] [↩]