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Investment Overview for Chevron (NYSE:CVX)

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1. Impact of Coronavirus And Oil Price War Crisis On ConocoPhillips' Stock

Chevron's stock declined 30% from levels of around $107 in early February to $75 levels currently (through April 3). This can be attributed to Saudi Arabia's launch of an all-out price war by boosting production in a bid to gain market share. This has resulted in over 45% dip in benchmark oil prices, with WTI down from around $52 levels by the end of January to $27 currently (through April 3). This will likely have a significant impact on Chevron's business, in terms of average price realized. We believe Chevron's Q1 results will confirm this reality with a drop in revenues. If signs of coronavirus containment aren’t clear by the earnings release timeframe, it’s likely Chevron's stock, along with the broader market, is going to see a continued drop when results confirm palpable reality.

2. 2019 Performance

Sales and other operating revenues for 2019 were $146 billion, compared to $166 billion in 2018, reflecting a decline of 12% on account of decline in realizations stemming from lower crude oil and natural gas prices. Company’s earnings per share were $1.54 against $7.74 due to upstream impairments and write-offs totaling $10.4 billion associated with Appalachia shale, Kitimat LNG, Big Foot and other projects. The company also recognized a $1.2 billion gain on the sale of the U.K. Central North Sea assets in the fourth quarter. Foreign currency effects decreased earnings in the fourth quarter 2019 by $256 million. Adjusted for the above, earnings for 2019 would have been $6.44.

3. Crude oil Prices

With a large part of company’s revenues and valuations coming from Upstream (drilling and production) operations, crude oil price has a major impact on the company’s operations, while its price outcome is completely outside company’s control which depends on various factors like global supply and demand, OPEC (Oil Production and Exporting Countries) Actions and geopolitical events. For Chevron, the WTI realization price averaged $57 per barrel for the full-year 2019, compared to $65 in 2018, a decline of 12%, while the company was able to increase its volume by 4%, resulting in a decline of 8% in its crude oil revenues.

4. Permian Basin To Drive Production Growth

Increased production in the Permian Basin has resulted in insufficient gas pipeline and fractionation capacity in the near-term, and over-supply conditions, leading to depressed natural gas and natural gas liquids prices in West Texas. A sizable portion of Chevron’s U.S. natural gas production comes from the Permian Basin, resulting in natural gas realizations that are significantly lower than the Henry Hub price.

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Below are key drivers of Chevron's value that present opportunities for an upside or downside to the current Trefis price estimate for Chevron:

• Upstream EBITDA Margin: Chevron's upstream division's EBITDA Margin decreased from around 62% in 2012 to 45% in 2015, primarily reflecting the decrease in average price realizations for liquids (Crude oil & NGL). While the low commodity prices weighed on the company's top line in 2016, it managed to significantly reduce its operating costs during the year, which resulted in a boost in its EBITDA margin. The company recorded upstream EBITDA margin of 56% in 2016. However, the margins dropped to 47% in 2017, primarily due to higher commodity prices. They have now eased up to 49% in 2019.
  Going forward, we forecast Chevron's Upstream EBITDA Margin to gradually increase to around 50% by the end of our forecast period, on the back of a steady recovery in global crude oil prices. However, if prices do not increase at the rate projected, and EBITDA margins remains at 45% by the end of our forecast period, there would be a 7.4% downside to our Trefis prices estimate. On the other hand, if prices increase more than expected, resulting in a higher EBITDA margin of 60%, there would be 10% upside to the Trefis price estimate.


• Downstream EBITDA Margin: Chevron's downstream division, which primarily manufactures and sells refined products and petrochemicals, constituted ~70% of the company's operating revenues but just around 26% of its total EBITDA in 2015. This is primarily due to the low EBITDA margins of the division. EBITDA margins for the division depend on the price differential between input (crude oil, ethanol, etc.) and output (gasoline, kerosene, ethylene, etc.). In 2016, the company's downstream operations turned negative due to the recovery in commodity prices. However, it turned positive in 2019, clocking in 0.6%.
  Going forward, we expect downstream margins to improve in the short to medium term, but remain at around 1% in the long run due to overcapacity in the global refining market and declining demand for gasoline in developed markets. However, if Chevron's downstream EBITDA margins increase and reach around 4% by the end of the forecast period, due to a combination of higher growth in demand for refined products in emerging markets and a slower decline in petroleum fuel consumption in the developed economies, there could be a 7% upside to our current price estimate for Chevron.

For additional details, select a driver above or select a division from the interactive Trefis split for Chevron at the top of the page.

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Chevron Corporation is the second largest energy company in the U.S., after Exxon Mobil. The company manages its investments in subsidiaries and affiliates and provides administrative, financial, management, and technology support to U.S. and international subsidiaries that engage in fully integrated petroleum, chemicals, and mining operations, as well as power generation and energy services.

Chevron has operations in 180 countries along with a strong network of retail gas stations under the Chevron, Texaco, and Caltex brands.The company is also involved in pursuing alternative energy solutions.

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Crude Oil and Natural Gas Liquids production is by far the most valuable segment for Chevron for the following reasons:

Higher profitability compared to downstream activities like refining

Although, the revenues attributed to crude oil and NGL production are less when compared to downstream businesses like refined product sales, the profitability is much higher. We estimate that EBITDA margins for crude oil and NGL production were around 47% in 2017 compared to 2.5% EBITDA margin for its refined product sales during the year.

The difference in margins is attributable to the fact that the cost of production per barrel is quite low for crude oil compared to its selling price. For 2017, the company's average selling price for crude oil was around $49 per barrel when average production costs were around $11.50 per barrel.

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Peak oil

It is estimated that a large part of the world's oil reserves have already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.

However, many institutions such as the International Energy Agency (IEA) believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand of energy will be met at all times to come.

Improvements in technology

Due to limited underlying growth in product demand, there has been a movement in recent years towards increasing the complexity of refineries rather than expanding capacity. In the U.S., no new refineries have been built since 1980, however, improvements in process design and technology has seen capacity increase around 1% per year.

The early refineries that were established were mainly used to process light sweet crude resulting in an increase in demand for light sweet crude. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. In addition, interest in the development of new cost effective methods for extracting and transporting heavy crude oil, for refining into valuable light and middle distillate fuels, is also increasing.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

See more on: DCF Methodology

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