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Will Upstream Gains Lead Chevron (CVX) to Strong Q4 Earnings?

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It's earnings season again, and oil supermajor Chevron (CVX - Free Report) is gearing up to release its fourth-quarter results on Jan 27. This time around, the primary contributor to the company’s earnings — its upstream (or exploration and production) division — is likely to have benefited from the ongoing strength in oil and natural gas prices. Chevron also has a downstream business, which refines crude oil into fuels like gasoline and diesel.   

Chevron has extensive upstream operations in all major hydrocarbon-producing regions of the world. The company is primarily involved in the acquisition, development and exploitation of crude oil and natural gas properties.

Click here for a complete rundown of the company’s expected Q4 performance.

A Look at Chevron’s Upstream Performance in Q3

Chevron’s production of crude oil and natural gas — at 3,027 MBOE/d (56% liquids) — remained essentially flat year over year.

The latest volume statistics reflect higher output from the Permian Basin and the absence of weather-related disruptions in the Gulf of Mexico, offset by the end of the Erawan and Rokan concessions in Thailand and Indonesia, respectively.

The U.S. output was up 4.3% year over year to 1,176 MBOE/d, though the company’s international operations (accounting for 61% of the total) fell 2.9% to 1,851 MBOE/d.

Despite volumes remaining unchanged from last year, Chevron’s upstream segment recorded a profit of $9.3 billion in the third quarter of 2022, rocketing from the $5.1 billion earned in the year-ago period and beating the Zacks Consensus Estimate of $8.2 billion.

This was primarily on account of a significant improvement in commodity prices. At $76 per barrel, Chevron’s average realized liquids’ prices in the United States were 31% above the year-earlier levels, while prices overseas rose 30.9%. On the natural gas front, its realizations soared 116.9% and 65%.

Robust Oil, Gas Prices to Boost Q4 Upstream Income

Even as fears revolving around high inflation and slowing growth somewhat cloud the outlook for oil, the space remains healthy. Apart from a positive fundamental picture, the sector has been enjoying support from geopolitical uncertainty amid Russia’s military operations in Ukraine. With the conflict showing no sign of a quick resolution, the risk of dwindling inventory and the influential oil exporters’ group OPEC sticking to a conservative production profile, the commodity remained fairly strong in 2022.

Although the Zacks Rank #3 (Hold) company maintains an oil-heavy production mix, natural gas still contributes some 40% to the total volume. This healthy exposure to natural gas could also work in Chevron’s favor as the price of natural gas has improved from the year-ago levels. As a matter of fact, the consensus marks for the fourth-quarter average sales price for natural gas in the U.S. and international stands at respectively $5.04 per thousand cubic feet (Mcf) and $8.28 compared to $4.78 (U.S.) and $7.90 (international) in the corresponding period of 2021.

You can see the complete list of today’s Zacks #1 Rank stocks here.

In other words, Chevron is set to benefit from the strength in crude and natural gas prices. For the to-be-reported quarter, the Zacks Consensus Estimate for the upstream segment is pegged at a profit of $6.7 billion, some 30% higher than the prior-year quarter’s income of $5.2 billion.

Overall Earnings & Revenue Projections

The Zacks Consensus Estimate for fourth-quarter earnings is pegged at $4.16 per share, suggesting a 62.5% surge on the prior-year quarter’s reported figure of $2.56. For quarterly sales, the consensus mark of $52.6 billion suggests a rise of 9.4% from the year-earlier quarter’s reported number.

Important Energy Releases So Far

While we wait till Friday for CVX to come out with Q4 numbers, let’s take a look at two key energy releases so far.

SLB (SLB - Free Report) , the largest oilfield contractor, announced fourth-quarter 2022 earnings of 71 cents per share (excluding charges and credits), which beat the Zacks Consensus Estimate of 69 cents. SLB recorded total revenues of $7.9 billion, outpacing the Zacks Consensus Estimate by 0.7%.

SLB’s strong quarterly earnings resulted from strong activities in land and offshore resources in North America and Latin America. The company’s board approved a quarterly cash dividend of 25 cents per share, indicating a 43% increase from the last paid dividend.

On the other hand, energy infrastructure provider Kinder Morgan (KMI - Free Report) reported fourth-quarter 2022 adjusted earnings per share of 31 cents, in line with the Zacks Consensus Estimate. The bottom line was primarily aided by higher gathering and transport volumes, offset by lower contributions from KMI’s Product Pipelines offset the positives.

As of Dec 31, 2022, Kinder Morgan reported $745 million in cash and cash equivalents. The company’s long-term debt amounted to $28.3 billion. For 2023, KMI expects a dividend of $1.13 per share, suggesting an increase of 2% from the prior-year reported figure.

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