Chevron Feels Squeeze on Refinery Margins, Lower Oil Output Than Expected

CVX: Chevron logo

Oil major Chevron (NYSE:CVX) warned that its Q4 earnings would be slightly below expectations as recovery in oil output was lower than expected and refinery profits just broke even because of lower margins and falling volumes. [1] The company had posted a strong Q3 last year as results were boosted by profits on refining asset sales and foreign exchange gains. While the company managed to boost its international oil equivalent production by 42,000 barrels a day (bbl/d), lower output in the U.S. and a drop in gas prices are expected to temper upstream results. The company will be announcing its Q4 results on the 27th – around the same time as other oil majors like Exxon Mobil (NYSE:XOM) and BP (NYSE:BP).

We have a $109 price estimate for Chevron, which is at almost in-line with its present market price.

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Upstream stays unmoved

Chevron managed to boost its international liquids output by nearly 30,000 bbl/day over the last quarter. A large part of this growth is attributed to the completion of maintenance activity in Kazakhstan, the resolution of a pipeline incident and a production ramp up in Thailand. The company also improved its gas output in the U.S. as well as internationally. Total production in the U.S, almost stayed at Q3 levels as lower oil output was cancelled by increased gas production.

With regards to pricing, gas prices fell sequentially in the U.S. while realizations per barrel increased for crude as well as natural gas liquids in the country. Internationally, liquids realization fell slightly while gas prices remained unchanged over the last quarter.

Downstream hit

Downstream earnings for the company took a major hit in the quarter as margins declined. Refinery input volumes fell by almost 20% in the U.S. and 10% internationally because of turnaround operations and sale of refining assets in the U.K. Refining margins fell both within the U.S. and outside the country. Downstream margins are cyclical and tend to decrease with higher crude prices.

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  1. Chevron Issues Interim Update for Fourth Quarter 2011, Chevron []