Chevron’s Downstream Recovery Balances Weaker Upstream Earnings

CVX: Chevron logo

Chevron (NYSE:CVX) released its Q2 earnings figures, posting a 19% drop in its upstream earnings over the same period last year because of a drop in oil and gas prices. The overall earnings decline in the period was tempered by a sharp increase in downstream earnings as refining and marketing margins recovered. Natural gas prices in the U.S. touched their lowest level over the past decade in Q2 because of weak winter demand and continuing oversupply. Oil prices also slid in the quarter because of weak economic news from Europe and from emerging markets. Chevron also posted a fall in production volumes in the period.

We have revised our price estimate for Chevron to $115, which is at a 5% premium to its current market price. The higher price estimate reflects over view that Chevron’s high capital expenditure will result in higher oil and gas production volumes over the long term. In particular, output from the company’s giant LNG facilities in Australia should boost output levels. We also expect oil prices to rise over the long term because of higher demand from emerging markets and limited increases in global production.

Click here for our full analysis of Chevron.

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Upstream disappoints

Chevron’s quarterly upstream earnings fell to $5.6 billion from $6.9 billion over the same period last year. About half of the drop in earnings was because of lower earnings in the U.S., where gas prices fell below $2 / Million British thermal units (MBtu) in the last quarter on fears that the U.S. would run out of storage space for the fuel. Earnings from Crude also declined slightly in the period as prices eased to $97 / barrel from $104 / barrel a year ago. Net oil equivalent production was down 5% over the same period last year, mainly because of field declines and asset sales in the period. Gas production declined by 9% in the period.

International upstream earnings saw a 12% decline over Q2 2011. The drop in earnings was mainly because of the fall in crude oil prices and higher exploration costs, which were partially offset by higher natural gas prices. Production from expansion activity in Thailand and Nigeria was offset by field declines and the shut down of production from Frade fields in Brazil.

Downstream revival

Downstream earnings posted a sharp recovery in the period as lower crude prices resulted in higher refining and marketing margins. U.S. downstream earnings increased 42% over Q2 2011 to touch $802 million. International downstream earnings rose to $1.07 billion from $0.48 billion a year ago. The results received a $200 million boost because of an asset sale in South Korea. Refining input increased in the U.S. but dropped internationally because of asset sales last year.

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