Chevron’s Stock Tanks After The Company Misses The Market Estimate

by Trefis Team
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Contrary to market and analyst expectations, Chevron Corporation (NYSE:CVX) posted a disappointing financial performance for the December quarter and full year 2016 on 27th January 2017((Chevron Announces December Quarter 2016 Results, 27th January 2017, www.chevron.com)), causing its stock to plunge almost 2.5% post the announcement. Although the US-based integrated energy company showed an improvement in its fourth quarter revenue backed by the recovery in commodity prices, it missed the quarterly as well as annual consensus estimate for both revenue and earnings by a huge margin, due to a number of factors such as weak downstream margins, extensive turnaround at the Richmond refinery, and income tax expense instead of tax benefit in the previous quarters. Going forward, we expect Chevron to expand its production to leverage the improving outlook for the oil and gas industry, maintain its operating margins by controlling its cost structure, and enhancing its shareholder value by increasing its returns and dividend payments.

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Data Source: Google Finance

Key Trends of Chevron’s 4Q’16 Results

For the December quarter, Chevron’s upstream production, particularly crude oil and natural gas liquids (NGLs), remained low. While some of the company’s major capital projects recorded production growth, it was more than offset by normal field declines, impact of asset sales, and civil unrest in Nigeria. Yet, the recovery in commodity prices more than offset the impact of lower production and resulted in earnings of $930 million from its upstream operations, compared to a loss of $1.4 billion in the same quarter of last year.

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In contrast, Chevron witnessed a sharp decline in downstream operations during the quarter. Apart from lower margins on refined product sales due to rising commodity prices and higher tax expenses, the company saw an extensive turnaround at the Richmond refinery, a once in every five year event, which weighted heavily on its downstream profits. As a result, the oil and gas major posted a profit of $357 million in the quarter, as opposed to a profit of $1 billion a year ago. In fact, on an annual basis, the energy company experienced a slide of almost 55% in its 2016 downstream earnings compared to 2015.

On the cost side, Chevron continued to create a dent on its cost structure by bringing down its operating expenses. For the full year 2016, the company managed to reduce its operating cots by roughly 13% compared to the prior year. However, despite the decline in operating costs, the oil and gas producer generated an adjusted profit of only 94 cents per share for the full year 2016, drastically lower than a profit of $3 per share earned in 2015.

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On the cash flows side, Chevron generated $12.8 billion from its operations during 2016, significantly lower than $19.5 billion generated in the previous year. Of this, $7.5 billion was raised through additional debt during the year. As a result, the company’s debt to capital ratio rose from 20% in 2015 to 24% in the current fiscal. Further, the oil and gas player completed divestment of assets worth $2.8 billion during the year, on track to achieve its objective of closing asset sales of $5-$10 billion in the time frame of 2016-2017. On the outlay front, the US-based company spent $18.1 billion in capital expenditure for the full year 2016, roughly 40% down from the expenditure in 2015. Also, the company paid dividends of $8 billion or $4.29 per share during the year, slightly higher than the dividend paid last year.

Going Forward

With the OPEC decision to curtail its combined oil production over the next few quarters, the outlook for commodity markets has turned positive. Consequently, Chevron expects to become cash balanced in 2017, with continued cash improvement in 2018 and beyond. Further, the company will remain focused at maintaining and/or growing its dividend, subject to the recovery in commodity prices and its cash flows. However, the oil and gas producer will continue to keep its capital and exploration budget in check over the next couple of years. For 2017, the company aims to spend $19.8 billion on its capital allocation program, with majority of the spend concentrated at short-cycle upstream projects. For 2018 and beyond, the company expects to keep its capital spending in the range of $17-$22 billion, subject to the trajectory of the recovery in commodity prices.

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