Recovering Oil Prices, Potential Acquisition Likely To Boost Chevron’s 2019 Results

by Trefis Team
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Chevron (NYSE:CVX) is an oil major that has both upstream and downstream operations. For the first quarter, the company reported a decline in revenues as well as earnings due to a retrenchment in the price of crude oil and natural gas. However, the recovery in oil prices over April and an expected uptick over the rest of the year should have a positive impact on the company’s results for the year. Additionally, we believe that Chevron is likely to follow up its failed attempt to acquire Anadarko with a sizable acquisition over coming months as it looks to bolster its presence in the promising Permian basin.

As a result, we maintain a price estimate of $142 per share for the company, which is roughly 20% higher than its market price. View our interactive dashboard What was Chevron’s Q1 results, and what’s its 2019 outlook? and modify the key drivers to visualize the impact on the company’s valuation. Also, you can also find more of our Energy sector data here

What are the sources of Chevron’s revenue?

  • Upstream segment: Chevron’s  Upstream operations largely consists of crude, and natural gas production.
    • U.S. Upstream: U.S. Upstream operations earned a total of $748 million in Q1 2019 – up from $648 million a year ago. We expect earnings to remain steady in the coming quarters with the price of crude and natural gas remaining range bound. The company produced a an average of 884,000 BOE per day during the quarter (up 12% from Q1 2018) thanks to a 17% increase in natural gas production. The company realized an average price of $48 per BOE during the quarter in its Upstream operations.
    • International Upstream: The company’s international Upstream segment earnings came in at $2.3 billion for the quarter – down from $2.7 billion a year ago due to lower Brent crude, and softer European natural gas prices. The company produced a net 2.35 million BOE per day for the quarter, and the average realized per BOE for the quarter came in at $60.
  • Downstream segment: The downstream segment largely consists of refining operations.
    • U.S. Downstream: U.S. downstream operations earned a total of $217 million – less than half the figure a year ago. This is primarily because the price of refined products fell due to oversupply and softer demand. The company saw an increase in refining output by 1.1% for the quarter, with total refining output coming in at 1.19 million barrels per day.
    • International Downstream: Refinery output for the International Downstream segment fell from 669,000 barrels to 43,000 barrels due to the company’s sale of its Cape Town unit – in turn leading to a sharp reduction in earnings. In total the company produced 1.42 million barrels per day.

Key takeaways from Q1 2019 results:

  • The company saw its production rise from  2,852 MBOED to 3,038 MBOED for the quarter. With the average realized price per barrel of crude coming in at $63 vs $67 a year ago, associated revenues remained largely level year-on-year.
  • The company’s upstream operation faced an earnings downturn during the quarter as the realized price of crude and natural gas fell. In addition to lower prices, the company faced a further foreign-exchange loss of $266 million on its international operations.
  • Downstream operations faced losses as refining prices fell during the quarter, resulting in a loss of $325 million YoY.
  • The company currently has a net debt ratio of 13.6%. We expect that its net debt ratio will fall to around 13% by the end of the year as Chevron should use excess cash flow to pare back debt.
  • Earnings came in at $2.6 billion for the quarter. We expect earnings to come in around $10.6 billion for the full year primarily due to an improvement in the price of commodities

Key Note on the Anadarko Takeover

Chevron was looking to improve its operational efficiency by offering a deal to takeover Anadarko.  But the deal fell through as Occidental Petroleum offered better terms to Anadarko. The deal is largely expected to go through, with Chevron at this point not looking to put in a counter-offer. However, Chevron is likely to continue to explore other acquisition targets in the near future.

Our Outlook for Chevron in 2019

  • In 2019, the company will continue to focus on unit costs. We believe that this focus will help improve margins in the coming quarters, and years. With most of its large projects finished, the company is set to see improved margins in the near future.
  • Our expectations of commodity prices increasing during the year should help drive earnings.
  • Also, with large projects finished, the company should see lower outlays for capital expenditure during the year. This should help the company improve its cash flow. We expect the company to realize free cash flow of around $3.2 billion for the year.

We maintain a $142 price estimate for Chevron based on our estimate of $7.51 and a P/E multiple of 19x. That said, if the price of crude and natural gas fall relative to the levels they were in the first quarter, then the company’s  revenues and earnings could potentially be under considerable pressure.

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