Chevron’s 2Q’17 Earnings To Drop Sequentially Due To Weak Commodity Prices

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Chevron (NYSE:CVX), one of the world’s largest integrated energy companies, is slated to release its June quarter financial performance on 28th July 2017((Chevron To Announce June Quarter 2017 Results, www.chevron.com)), the same day Exxon Mobil (NYSE:XOM), its closest competitor, announces its results for the quarter. Similar to Exxon, the market expects Chevron’s upstream revenues to take a hit due to the slowdown in the rebound of commodity prices during the second quarter. However, based on the seasonal trends, the analysts expect the company’s downstream operations to somewhat offset the lower upstream prices realized during the quarter. In addition to this, the US-based company continued to divest its non-core or non-strategic assets to maintain liquidity and fund its capital requirements for the year.

See Our Complete Analysis For Chevron Here

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Volatility In Commodity Prices To Impact Upstream Operations

The rally in crude oil prices due to the OPEC production cuts came to a halt as the US oil production and inventory levels rose sharply in the second quarter. As a result, the WTI crude oil prices dropped from an average of $52 per barrel in the first quarter of 2017 to $48 per barrel in the latest quarter. Consequently, we expect Chevron’s upstream price realization for the quarter to be lower than that of the previous quarter, impacting its June quarter revenues on a sequential basis. However, as mentioned earlier, the company’s downstream operations is expected to partially offset the negative impact of its weak upstream performance.

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

Rapid Asset Sales To Finance Capex

During the quarter, the oil and gas producer announced the sale of its upstream Bangladesh assets, including the Bibiyana, Jalalabad, and Moulavi Bazar fields, which primarily produce natural gas. Other asset sales during the quarter include sale of its downstream Canadian assets for $1.09 billion, sale of its downstream South African operations for $900 million, and the sale of its upstream Gulf of Mexico Shelf (shallow water) assets for which the price wasn’t disclosed. Chevron also sold off its 30% stake in Brazil’s Campos Basin in June for an undisclosed amount. These deal will not only allow the company to focus on high-margin oil plays in its key basins, but will also provide the necessary cash to bridge the gap between the company’s operating cash flows and outflows in the form of capital expenditure and dividend payments.

Chevron’s Divestment Program

Source: Chevron’s Investor Presentation, June 2017

Expected Revision In Production Growth Or Capex Budget 

Despite these divestments, the company has an aggressive production growth plan for the year. The integrated company expects its production (excluding asset sales) to grow by 4-9% in 2017. For this, the company has set aside a capital spending budget of $19.8 billion for 2017 and plans to spend $17-$22 billion over the next couple of years. While the capital investment for the current fiscal is lower compared to 2016, it is likely to weigh on the company’s cash flows in the current weak oil price environment. Consequently, we expect the company to pull back on its capital spending or production plans for the year in this quarter’s earnings release.

Source: Chevron’s Investor Presentation, June 2017

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