Chevron’s Stock Surges As The Company Posts Better-Than-Expected 3Q’16 Earnings

Chevron (NYSE:CVX), one of the world’s largest integrated energy companies, posted a huge earnings surprise in its September quarter results on 28th October 2016, ^[1] backed by its consistent cost reduction efforts and notable recovery in commodity markets. The oil and gas company reported a drastic turnaround in its top line as well as bottom line, converting the losses incurred in the last quarter into profits in this quarter. Consequently, the market rightfully rewarded the company last week, when the company’s stock price rose almost 4% post the announcement of the results.

Source: Google Finance; US Energy Information Administration (EIA)

Chevron witnessed a sizeable recovery in its price realizations, due to the rebound in commodity prices during the third quarter. While the realized price for crude oil improved only 3% compared to the second quarter, the realization for natural gas recovered more than 56% in the last three months. This rebound in prices caused Chevron’s revenue to grow to $30.1 billion, representing a growth of around 3% on a sequential basis. Yet, the revenues remain 12% lower compared to the same quarter in the previous year, since the commodity prices have not recovered completely.

On the cost side, Chevron made significant progress in its efforts to control its operation costs. Year-to-date, the integrated company has managed to bring down its costs by 23% compared to the same period of 2015. These cost savings trickled down to the company’s operating profits, resulting in a huge improvement in its margins. Chevron recorded a pre-tax income of $1.1 billion in the third quarter, as opposed to a loss of $2 billion in the second quarter. This notable improvement, coupled with the tax benefit booked during the quarter, caused a significant jump in its the oil and gas company’s net income. The US-based company reported net earnings of 68 cents in the quarter, as against a loss of 78 cents in the previous quarter.

Source: Chevron’s 3Q16 Presentation

However, in terms of cash flows, Chevron continued to struggle. The company generated $5.3 billion from its operations and realized $0.8 billion from asset sales. While the company restricted its capital expenditure budget and did not raise its dividend, its cash flows (including asset sales) were just enough to meet the company’s capital spending needs and dividend payments. Thus, the oil and gas major had to raise additional debt of $0.5 billion to meet its other obligation, resulting in a negative cash position at the end of the quarter.

Chevron’s Cash Flow Position

Overall, Chevron’s financial position has improved over the last three months, and the market seems to be optimistic about its future prospects. We currently have a price estimate of $104 per share for Chevron, which is in line with its market price. We will be revisiting our estimates for the company in the light of the latest numbers and guidance shortly.

Have more questions about Chevron (NYSE:CVX)? See the links below:

• Chevron 3Q’16 Earnings To Be Higher Than The Last Quarter Owing To Improved Commodity Prices
• How Will Chevron’s Revenue Move If Crude Oil Prices Rebound To $100 Per Barrel By 2018?
• How Will Chevron’s Revenue Move If Crude Oil Prices Average At $50 Per Barrel Until 2018?
• Is LNG The Next Big Thing For Oil And Gas Companies?
• Chevron’s 2Q’16 Earnings To Be Severely Hit Due To Persistently Low Commodity Prices
• What’s Chevron’s Revenue & Earnings Breakdown In Terms of Different Products?
• What’s Chevron’s Fundamental Value Based On Expected 2016 Results?
• What Has Led To More Than 30% Decline In Chevron’s Revenues & EBITDA In The Last Five Years?
• How Has Chevron’s Revenue Composition Changed In The Last Five Years?
• By What Percentage Can Chevron’s Revenues Grow Over the Next Five Years?
• Why Crude Oil & NGLs Operations are 3x As Valuable As Refined Products Operations For Chevron?

Notes:

1. Chevron Announces Its Third Quarter 2016 Results, 28th October 2016, www.chevron.com [↩]