Chevron To Post Strong December Quarter Earnings Backed By Oil Price Recovery And Cost Reduction Measures

by Trefis Team
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Over the last three months, Chevron Corporation (NYSE:CVX), the US-based integrated energy company, has witnessed a jump of almost 15% in its stock price, largely because of the recovery in commodity prices, which was mainly driven by the Organization of Petroleum Exporting Countries’ (OPEC) decision to hold back 1.2 million barrels per day (Mbpd) of its cumulative oil output over the next few quarters. Further, the overall oil and gas industry felt a wave of optimism with the appointment of Donald Trump as the President of the US, given his inclination towards the growth of the sector. Keeping these factors in mind, the market expects the oil and gas major to report a solid improvement in its December quarter financial results on 27th January 2017((Chevron To Announce Fourth Quarter 2016 Results, 5th January 2017, www.chevron.com)), marking another quarter of improvement for the company.

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Key Trends Witnessed By Chevron In The 4Q’16

As mentioned earlier, commodity prices bounced back sharply in the fourth quarter of 2016 on the back of the agreement between OPEC and some Non-OPEC members to curtail their combined oil production by 1.8 Mbpd over the next few quarters. The WTI crude oil prices shot up to $49.21 per barrel in the December quarter, rising around 10% during the quarter, while the Henry Hub natural gas prices ended the quarter at $3.71 per Mcf, increasing more than 30% in the same period. Given the improvement in commodity prices, we expect to see a steep rise in Chevron’s price realizations for its upstream production, which will in turn boost its top-line for the quarter.

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Data Source: US Energy Information Administration (EIA)

On the cost side, the integrated company has managed to reduce its operating costs significantly over the last few quarters. At the end of the third quarter, the oil and gas player had cut its costs by 23% compared to the same period of 2015. With a continued focus on streamlining its cost structure, we expect the company’s operating profits and margins to go up sequentially in the current quarter.

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In terms of operational updates, Chevron announced that it had managed to deliver the first production from its Alder gas condensate field in the Central North Sea in November 2016((Chevron Announces First Gas At UK Alder Field, 7th November 2016, www.chevron.com)). The project has a planned design capacity of 110 million cubic feet (MMcf) of natural gas and 14,000 barrels of condensate per day. The commencement of production at the Alder field is a significant milestone for the company, as the project will add sizeable production to its portfolio, and help to extend the field life of Britannia, an important asset to Chevron in the North Sea.

Apart from this, Chevron entered into a sales and purchase agreement with Star Energy Consortium to sell its Indonesian and Philippines Geothermal assets in December 2016((Chevron Announces Sale Of Geothermal Operations, 23rd December 2016, www.chevron.com)). The deal is aligned with the oil and gas producers’ strategy to divest non-core and non-strategic assets in its upstream portfolio and direct the proceeds to high-margin projects and return value to the stakeholders.

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

Lastly, with the improving outlook of the commodity markets, Chevron has proactively announced its capital and exploratory investment budget for 2017 at $19.8 billion((Chevron Announces $19.8 Billion Capital And Exploration Budget for 2017, 7th December 2016, www.chevron.com)). Earlier the company had put forth a guidance of $17-$22 billion for 2017 and 2018. However, the company bend towards the higher end of the capital spending budget indicates that it is willing to invest money on high-margin projects and revive its stalled production. However, we will have to wait for the company’s 4Q’16 results for updates on the capital expenditure target for the year.

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