Better Price Realization Will Likely Aid Chevron’s Q1 Earnings

Chevron Corporation (NYSE:CVX) is set to report its Q1 2018 earnings on April 27, and we expect the company to post strong growth, primarily driven by improved price realization for its upstream operations. However, the company’s downstream operations may continue to be tepid. Further, the company’s efforts to reduce its operating costs and capital spending are likely to boost its bottom-line for the year. We have created an interactive dashboard on Chevron’s expected performance for 2018. You can adjust the revenue and margin drivers to see the impact on the company’s performance.

Upstream Operations Will Likely Post Solid Growth

Oil prices have been on a strong run this year, with WTI over $68 levels currently. Earlier in November 2017, the OPEC members extended their agreement to restrict the cumulative oil production by 1.2 million boed through 2018, and they have so far stood by their commitment, despite an increase in the U.S. oil exports to Asia. This has led to oil inventories at a five year low, and supported the rally in oil prices, along with other geo-political factors. The U.S., U.K, and France launched a missile attack after Syria was accused of using chemical weapons in an attack earlier this month. In addition, the Venezuelan economy is under tremendous stress and is expected to contract by 15% this year. These factors combined have pushed the oil prices higher. Accordingly, we estimate the annual average liquid price for Chevron could average at around $53.50 per barrel this year, reflecting a 10% growth, as compared to the prior year period. A pricing boost will aid the segment revenue growth, and also provide room for margin expansion.  However, we don’t expect much change in liquids production.

Chevron’s downstream operations may remain tepid in the near term, as the company continues to trim its exposure, and invest in more profitable upstream projects. It should be noted that Chevron’s total refining capacity has declined from around 2.2 million barrels per day in 2006 to 1.7 million barrels per day in 2017. In addition, improving vehicle fuel efficiency, and increased use of natural gas and bio-fuels may result in a lower demand in the long run.

Lastly, the company has restricted its capital spending budget to around $17-$22 billion in the coming years, primarily concentrated on the ramp up of its Gorgon LNG and Wheatstone LNG Projects in Australia, and shale and tight rock drilling activity in the Permian Basin. A lower capital investment will allow the company to focus at enhancing the results from its high-margin assets, while managing its cash flows to bring down its debt obligations in the near term.