How Higher Oil Price Realization Can Impact Chevron

Higher oil price realization will have a meaningful impact on Chevron Corporation’s (NYSE:CVX) top line as well as bottom line, according to our estimates. In fact, there could be as much as 10% upside potential to our price estimate for Chevron, if the average oil price realization is $70 in 2018. Big oil companies’ earnings are highly correlated with crude oil prices, which impact their upstream operations. This year, oil is on a strong rally with the WTI crude oil price recently touching the $71 mark, reflecting the highest level since late 2014. Higher oil prices will likely push the earnings growth for oil companies, such as Chevron. The company benefited from higher oil prices in Q1, with average liquid price realization of a little under $60 per barrel, reflecting roughly 25% growth from the prior year period. We have created an interactive dashboard that shows how changes in average oil price realization can impact the company’s performance. Below we discuss the factors that led to the recent oil rally, and our forecasts for Chevron’s upstream liquid revenues. 

Oil Prices Are Expected To Remain High In 2018

We estimate Chevron’s average liquids sales price to grow 12% to $54 levels, while we don’t expect any significant change in the production. Our forecast is based on the current trends in oil prices, which are on a strong run so far this year. The current WTI crude oil price reflects roughly 40% growth from the 2017 average. There were several factors that led to this move. In November 2017, OPEC and its allies extended their agreement for production cuts in 2018, which resulted in lower inventory levels. This aided the oil price growth. Last month, there were concerns over an alleged chemical attack in Syria, and it was responded to with missile launches by the U.S., U.K., and France. Furthermore, the Venezuelan economy is in turmoil, and it is expected to contract by 15% this year, according to the IMF. This has impacted Venezuela’s oil industry as well, and the oil production in the country has seen massive declines. Earlier this month, the U.S. decided to withdraw from the Iran Nuclear Deal. Iran is a large oil producer, and any diplomatic conflict will likely result in supply cuts, thus further pushing the oil prices higher. Despite the price movement, oil demand has remained strong, and most of the estimates suggest that the demand will outpace the supply this year. 

Given these factors, oil prices are expected to remain high in 2018. There could be a potential upside of over 10% to our price estimate if Chevron’s average price realization is around $70 this year, as shown in the scenario on the interactive dashboard analysis. (Check the “Compare” box in the upper left for “Average Liquids Price Realization Is $70 In 2018.”) We currently forecast the earnings of $7.10 per share for 2018, and we have a price estimate of $133, which is slightly above the current market price.