Earnings Preview: Chevron

U.S. energy behemoth Chevron Corporation (CVX - Analyst Report) is scheduled to report its fourth quarter 2011 results on Friday January 27, 2012 before the start of trading.

The Zacks Consensus Estimate for the to-be-reported quarter is a profit of $2.86 per share (with a downside risk of 1.05%) on revenues of $74.4 billion. In the year-ago quarter, Chevron recorded a gain of $2.49 per share (excluding adjustments for downstream asset sales and foreign-currency effects), while sales came in at $54.0 billion.

Third Quarter Recap

Chevron’s third-quarter 2011 results came in better than expected, riding on the back of higher oil prices and stronger refining margins. Earnings per share (excluding adjustments for foreign-currency effects) came in at $3.69, handsomely above the Zacks Consensus Estimate of $3.42 and the year-ago adjusted profit of $2.06. Quarterly revenue of $64,432 million was 29.6% higher from the prior-year quarter result of $49,718 million and was 14.7% above our projection.

(Read our full coverage on this earnings report: Chevron Beats Top and Bottom Lines).

Points to Ponder for Fourth Quarter

San Ramon, California-based Chevron is one of the six super major oil and gas companies in the world and the second-largest energy firm in the U.S. behind Exxon Mobil (XOM - Analyst Report). As a vertically-integrated oil entity, it is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses.

We expect results for the Exploration and Production arm to be about the same as the third quarter performance, as higher overseas production and crude prices will likely offset perennially low prices for natural gas.

But the integrated major’s fourth quarter refining and marketing results would roughly break even because of weaker profit margins, lower refinery input volumes and the absence of proceeds from the sale of a major refinery that buoyed last quarter’s numbers.

On the whole, we expect earnings to be significantly below the previous quarter, pulled down by a major maintenance activity at the Richmond, California refinery and last year’s sale of the Pembroke U.K. refinery.

Agreement of Analysts

As a result of the above-mentioned factors, there has been a downward bias among the analysts regarding Chevron’s outlook. In particular, we see a notable number of estimate revisions over the past 30 days.

Out of the 14 analysts covering the stock, 10 have lowered their estimates for the fourth quarter of 2011, while none have gone in the opposite direction.

Magnitude of Estimate Revisions

Consequent to analysts revising estimates southward over the past 30 days, the Zacks Consensus Estimate for the quarter has gone down by 44 cents (from $3.30 to $2.86).

Surprise History

The company has surpassed the Zacks Consensus Estimate in each of the last 4 quarters, performing consistently during this period. But this time, we will be surprised if Chevron reports better-than-expected results yet again, particularly after it issued an interim update warning of weaker profits on the back of a refining slump.   

Our Recommendation

Chevron shares currently retain a Zacks #3 Rank, which translates into a short-term 'Hold' rating. We are also maintaining our long-term Neutral recommendation on the stock.

Chevron is one of the largest integrated energy companies in the world and has an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.

However, due to its integrated nature, Chevron is particularly susceptible to the downside risk from any weakness in the global economy. We are also concerned by the company’s high level of capital spending, which may result in reduced returns going forward.

As such, we see the stock performing in line with the broader market and prefer to remain on the sidelines.

Read the full analyst report on CVX

Read the full analyst report on XOM