Mixed Bag in Chevron’s Q2 Update

Chevron Corp. (CVX - Analyst Report), the fourth-largest publicly traded oil and gas company in the world, yesterday issued an interim update for the second quarter of 2009. The company expects the upstream segment to benefit from an increase in crude oil prices. This may be partially offset by the effects of an unfavorable foreign currency movement. The company also said that lower refinery margins may hurt the downstream segment.

In the first two months of the second quarter, total domestic oil equivalent production increased 11 thousand barrels per day (MBOE/d) from first-quarter levels, driven by the restored Gulf of Mexico operations. The net international oil equivalent production, however, fell by 13 MBOE/d from the first-quarter level.

During the first two months of the second quarter, crude price realizations averaged at $48.79 a barrel, up from $36.85 in the first quarter. Realized natural gas prices for this period averaged at $3.26 per Mcf, compared with $4.14 in the first quarter.

Chevron anticipates downstream earnings to be affected by significantly lower refining margins. While the outlook for U.S. refining margins is gloomy, the company expects to increase marketing margins.

We view Chevron’s healthy upstream outlook as a positive for the company as more than three-fourths of its earnings comes from this segment. Chevron has extensive upstream operations in all major hydrocarbon-producing regions of the world. Its current development project pipeline is among the best in the industry, which is projected to add more than 1 MMBOE/d by 2011.

We continue to rate Chevron shares a Buy due to the company’s attractive inventory of development opportunities and recent exploration successes that put it in an advantageous position relative to its opportunity-poor peers. We believe that the company is capable of generating above-peer group average production and reserve growth in the next few years.