Chevron Corporation (CVX Quick QuoteCVX - Free Report) reported strong results in the last quarter, with earnings growing 274% from the March quarter of 2021 on top of sales that grew 70%. However, while sales beat the Zacks Consensus Estimate by 15.7%, earnings missed by 2.3%.

Analyst estimates are generally a good indication of the results a company is likely to report in any given quarter. That is because analysts study various aspects of the business including the major drivers of its growth, the internal strengths and weaknesses, the cost base on which it operates, pricing strength and so forth to arrive at projections of its future performance.

Hence, these projections are studied opinions that can be depended upon. But of course, there are many moving parts in this analysis, which means that there is a margin of error.

It follows that investors develop a certain expectation about a company’s earnings performance based on the estimates for the concerned period. So when a company significantly underperforms or outperforms analyst estimates, there is usually a reaction from investors that is represented in the share prices. In this case, investors greeted the news with a 1.3% decline in share prices. So they were clearly disappointed.

But the top- and bottom-line surprises don’t tell the whole story. So let’s try to tease out exactly where the estimates differed materially from the reported results.

Chevron missed earnings estimates by 2.3% on a net basis.

However, the results were not uniformly disappointing. While income from Upstream operations beat estimates by 6.7%, income from Downstream operations missed estimates by 41.8%.

Drilling down still further we find that the U.S. Upstream business disappointed by 3.4% while the international upstream business outperformed by 17.5%.

Also, while the U.S. downstream business was in line with expectations, the international downstream business missed by 286.8%.

The above anomaly is easily explained. Since total net oil equivalent production per day missed estimates by less than 1%, it follows that it was the price increases that proved hard to predict. And since the upstream business sells at the high prices, it has surprised positively. For the same reason, for the downstream business, high prices increase input costs, so it has surprised negatively.

Now let’s take a closer look at the positive revenue surprise of 15.7%.

Net per day liquids production missed estimates by 4.9% while natural gas production beat estimates by 4.8%.

Natural gas production in the U.S. beat by 6.2% while international production (which is 3X the U.S. production) missed by 1.9%.

Clearly, prices in both categories drove the revenue surprise.

Comparing Surprises Between Chevron and Exxon:

Conclusion

It’s clear from the above that deviation from estimates is largely on account of rising oil prices. As a result, production is easier to forecast than earnings. Also, the downstream business, particularly in non-U.S. markets appears to be hard to forecast, which could be a function of the price as well.

Zacks Rank

Chevron shares carry a Zacks Rank #2 (Buy). The Oil and Gas - Integrated – International industry to which it belongs is currently in the top 27% of Zacks-classified industries. So it is an industry worth investing in at this time. Some other stocks in this industry that may also be worth considering are Zacks #1 (Strong Buy) ranked Vista Oil & Gas (VIST Quick QuoteVIST - Free Report) and YPF Sociedad Anonima (YPF Quick QuoteYPF - Free Report) , as well as #2 ranked Exxon Mobil (XOM Quick QuoteXOM - Free Report) .

Price Performance Year-to-Date
 

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