Chevron Tanks As It Misses Market Estimate; Will Continue To Focus On LNG And Permian Operations
As expected, Chevron (NYSE:CVX), one of the world’s largest integrated energy companies, posted a strong improvement in its financial performance for its December quarter and full year 2017 last week((Chevron Announces December Quarter 2017 Results, www.chevron.com)). While the company’s top-line recovered because of the rebound in commodity prices, its earnings rose due to its efforts to control its operating costs and capital spending. However, despite this, the company was unable to meet the consensus estimate for both revenue as well as earnings, which caused its stock to tank about 6% post the announcement of results.
Going forward, Chevron will continue to expand its LNG operations in Australia and its oil output in the Permian Basin, which will drive its value in the long term. We currently have a price estimate of $118 per share for the company, which is 13% higher than its market price. We will be updating our model shortly to reflect Chevron’s 2017 results and guidance for 2018 and beyond.
See Our Complete Analysis For Chevron Here
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Key Highlights of 4Q’17 Results
- In line with its target for the year, Chevron’s 2017 upstream production (including asset sales) rose to 2.7 million barrels of oil equivalent per day (bpd), 5.2% higher than the previous year. This growth was primarily driven by the company’s first shipments from its LNG projects in Australia and impressive results from its operations in the Permian Basin.
- Further, the rebound in commodity prices led to a sharp recovery in the company’s price realization throughout the year. Consequently, Chevron’s upstream earnings for the year grew to a $8.2 billion versus a loss of $2.5 billion reported in the last year.
- The oil major’s downstream operations benefited from higher margins on refined product sales and absence of planned turnaround activity in its refineries in the December quarter. This was partially offset by the negative impact of the shutdowns due to the occurrence of hurricanes in the third quarter. For the full year, Chevron’s downstream earnings increased to $5.2 billion from $3.4 billion in the previous year.
- During the year, the integrated company generated cash flows of $20.5 billion from its operations. Of this, $18.8 billion was spent on the company’s capital investments in cash and $8.1 billion were utilized for dividend payments through the year.
- The improvement in Chevron’s cash flows due to lower capital spending, reduced cost structure, project ramp-ups and planned asset sales enabled it to increase its quarterly dividend to $1.12 per share, representing a jump of 4 cents on a quarterly basis. This move indicates that the company’s cash flow position is improving and it is willing to share this growth with its shareholders.
Going forward
- Given the optimistic outlook for commodity prices, Chevron expects to expand its production in the range of 4% to 7% in 2018 (excluding asset sales), assuming Brent oil prices become sticky at $60 per barrel. The growth will be driven by the company’s LNG operations in Australia and oil production in the Permian Basin. The company currently operates 16 rigs in the basin and plans to end this year with 20 rigs in the region.
- On the operational front, the oil and gas producer recently announced major discoveries at Ballymore and Whale prospect in the US deepwater Gulf of Mexico (GOM). While the extent of the discoveries is yet to be finalized, since these sites are closer to its existing infrastructure, it will allow the company to leverage its position and deploy its capital and technology much more efficiently to produce superior results.
- Furthermore, Chevron Phillips Chemical Company achieved start-up of two polyethylene units and reached mechanical completion of a new ethane cracker at its US Gulf Coast Petrochemicals Project in Texas. The ethane cracker is expected to reach full production in the second quarter of 2018 and contribute to the company’s downstream operations.
- On the recent tax reforms, the company expects the tax cuts to have a positive impact on its earnings in the coming years. Also, the company plans to invest around $25 billion in the US exploration markets over the next 3 years.
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