Chevron Posts Solid Earnings Backed By Higher Realizations And Cost Savings

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In line with expectations, Chevron (NYSE:CVX), one of the world’s largest integrated energy companies, reported a solid improvement in its March quarter 2017 earnings, [1] backed by a recovery in commodity prices and higher-than-anticipated refining margins during the quarter. In fact, the oil and gas major returned back to positive earnings in the quarter, and posted adjusted net earnings of $1.23 per share, as opposed to a loss of 11 cents recorded in the same quarter of last year, exceeding the consensus estimates by a fairly large margin. Consequently, the company’s stock surged by almost 2% to $107.60 per share during the day, before closing at $106.70 per share on 28th April, when the results were announced.

On comparing Chevron’s 1Q’17 performance with that of its closest rival, Exxon Mobil, the former experienced a higher rate of recovery in its top line as well as bottom line. This implies that the company’s efforts to control its cost and streamline its operations is paying off well.

See Our Complete Analysis For Chevron Here

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Operational Highlights

Due to the sharp recovery in commodity prices over the last few months, Chevron witnessed a strong jump in its price realizations for the March quarter, causing a steep rise in the company’s upstream revenue. However, the improved pricing environment was not accompanied by a significant increase in production. While the company’s oil production fell around 4% during the quarter, it was more than offset by a 9% increase in natural gas production.

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On the cost side, Chevron continued to bring down its operating expenses. In the first quarter of 2017, the company managed to reduce its operating costs by roughly 26% compared to the average operating costs in 2014. Consequently, the company generated a net profit of $2.6 billion, as against a net loss of $725 million in the same quarter of the previous year. CVX-Q&A-1Q17-5

In terms of cash flows, Chevron generated $3.9 billion from its operations, compared to $1.1 billion in the year ago quarter. Further, the company repaid $900 million of its long-term debt during the quarter, bringing down its debt ratio to 24%. In addition, the oil and gas producer paid a dividend of $2 billion during the quarter. Earlier this month, the company announced a dividend of $1.08 per share for 2Q’17. This indicates the company’s willingness to share its improving profitability with shareholders.

Apart from this, Chevron has been delivered successfully on its divestment program. The company completed asset sales of $2.8 billion in 2016, and closed deals worth $2.1 billion in the first quarter of 2017, keeping it on track to meet its divestment goal of $5-10 billion by the end of this year.

Going Forward

As the outlook for commodity markets has improved, Chevron continues to aim to become cash balanced in 2017, and to grow its free cash flows in the forthcoming years. Further, the company will remain focused on maintaining and/or growing its dividend and maintaining a strong balance sheet, subject to the recovery in commodity prices and its cash flows. However, the company plans to restrict its capital expenditures at under $20 billion for 2017 and between $17 to $22 billion in the next few years, with majority of the spend concentrated at short-cycle upstream projects.

In terms of operational growth, Chevron intends to grow its production (excluding asset sales) by 4-9% in 2017, and at a steady rate going forward. The company has a pipeline of over 20 projects that are likely to add roughly 2,150 thousand barrels of oil equivalent per day (MBOED) over the next 3-4 years. Of these projects, more than 80%  are either operational or are expected to come on-stream in 2017-2018. Higher production, coupled with higher price realization (backed by the recovery in commodity markets), should lead to strong growth in the company’s top line through the rest of the decade.

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Notes:
  1. Chevron Announces March Quarter 2017 Results, 28th April 2017, www.chevron.com []
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