Chevron Posts Poor 2Q’16 Earnings Despite Better Price Realizations In The Quarter

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As opposed to market expectations, Chevron (NYSE:CVX) reported a poor set of June quarter 2016 results last week, largely due to persistently low commodity prices and weak production.((Chevron Announces Second Quarter 2016 Results, 29th July, 2016, www.chevron.com)) Although the company managed to improve its revenue on a sequential basis due to better price realizations, its bottom line suffered severely due to one-time charges for asset sales and impairment booked during the quarter. As a result, the oil and gas major posted a loss of 78 cents (GAAP) versus the the consensus estimate of a profit of 32 cents for 2Q’16.

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While Chevron’s upstream operations continued to be affected by the commodity downturn, its downstream operations also saw a sharp drop in the second quarter due to weak refining margins throughout the industry. However, the integrated company’s consistent efforts enabled it to reduce its operating costs by 8% on a year-on year basis. Yet, the company recorded a net loss of $1.5 billion, almost double, on a sequential basis.

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On the financial side, Chevron made good use of the higher crude oil prices during the quarter and generated higher cash flows than the previous quarter. The company generated cash flows of $2.5 billion from its operations, the majority of which was used to pay dividends of $2 billion to its shareholders. In addition to this, the US-based company realized $1.3 billion from sale of assets, which enabled it to bridge the gap between its cash inflows and outflows to some extent during the quarter.

Chevron’s Cash Flow Position

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Source: Chevron’s 2Q’16 Presentation

Further, the company spent $4.5 billion in capital expenditure in the last three months, 90% of which was spent on its upstream projects. The company has a 2016 full year capital budget of $25-$28 billion, which could vary depending on the recovery of commodity prices. For the next two years, the company expects to keep its capital spending between $17 billion and $22 billion, subject to maintaining a cash balanced position. Consequently, the oil and gas giant aims to close asset sales of $5-$10 billion between 2016 and 2017 to finance its capital spending in the coming quarters.

Chevron’s Asset Sale Program

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Source: Chevron’s 2Q’16 Presentation

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Chevron

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