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Chevron Slips as Output Tumbles

CVX XOM

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U.S. energy giant Chevron Corp. (CVX - Analyst Report) reported weak third quarter 2012 results amid a drop in volumes and crude prices.

Earnings per share (excluding adjustments for foreign-currency effects) came in at $2.83, below the Zacks Consensus Estimate of $2.85 and way off the third quarter 2011 level of $3.69.

The integrated supermajor’s quarterly revenue decreased by 9.9% year over year – from $64,432.0 million to $58,044.0 million – and was 6.2% below our projection.

Segmental Performance

Upstream: Chevron’s total production of crude oil and natural gas decreased 3.2% from the year-earlier level to 2,516 thousand oil-equivalent barrels per day (MBOE/d). Volume gains in Thailand, U.S. and Nigeria were more than offset by normal field declines, the continued shut-in of the Frade deepwater field in Brazil, downtime associated with maintenance activities, asset sale, and Hurricane Isaac-forced disruptions in the Gulf of Mexico.

The U.S. output dipped 3.8% year over year, while Chevron’s international operations (accounting for 75% of the total) experienced a 3.0% decline in volumes. Losses on the production front were accompanied by depressed crude and North American gas prices, resulting in a 17.1% year-over-year drop in upstream earnings to $5,139.0 million.

Despite the slight dip in Chevron’s quarterly volumes, we believe its production outlook remains one of the most robust in its peer group, with a number of major initiatives scheduled to come online during the next few years. Major start-ups during the last few months include the deepwater Usan project in Nigeria and the Caesar/Tonga project in the deepwater Gulf of Mexico.

Amongst the major upcoming projects, Chevron is more than halfway through its Gorgon natural gas initiative in Australia and certain Gulf of Mexico field developments.

Downstream: Chevron’s downstream segment's earnings nosedived to $689.0 million during the quarter, from $1,986.0 million in the previous-year period. The deterioration can primarily be attributed to depressed domestic profit margins, higher operating expenses and lower gains on asset sales.

Capital Expenditure, Balance Sheet & Share Repurchases

The second-largest U.S. oil company by market value after ExxonMobil Corp. (XOM - Analyst Report) spent $8,430.0 million in capital expenditures during the quarter. Approximately 89% of the total outlays pertained to upstream projects.

As of September 30, 2012, the San Ramon, California-based company had $21,313.0 million in cash and total debt of $12,336.0 million, with a debt-to-total capitalization ratio of about 8.5%. As part of the stock repurchase program announced in 2010, Chevron repurchased $1,250.0 million worth of shares in the September quarter.

Recommendation & Rating

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 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 maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).

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