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Why Chevron (CVX) Could See Upstream Earnings Rise in Q1

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It's earnings season again and oil supermajor Chevron Corporation (CVX - Free Report) is getting ready to release its first-quarter 2018 results on Friday, Apr 27. While the downstream side of the picture appears rather tepid, sentiment across the upstream division is quite encouraging.

(See more in Chevron to Report Q1 Earnings: What's in the Offing?)

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.

A Look at Chevron’s Upstream Performance in Q4

Chevron’s total production of crude oil and natural gas increased 2.7% compared with last year’s corresponding period to 2,740 thousand oil-equivalent barrels per day (MBOE/d). The U.S. output fell 1.6% year over year to 671 MBOE/d but the company’s international operations (accounting for 76% of the total) was up 4.1% to 2,069 MBOE/d.

Apart from the core business in Gulf of Mexico and higher volumes from shale assets in the prolific Permian Basin, the rise in output could be attributed to contributions from major capital projects – Gorgon and Wheatstone in Australia as well as Angola LNG.

The rise in production was supported by higher oil realizations, the result being a healthy improvement in Chevron’s upstream segment profit – from $930 million in the year-earlier quarter to $5,291 million.

Commodity Prices Strengthen in Q1

Benchmark crude oil prices have risen sharply over the past nine months amid continued declines in domestic inventories and an improving supply-demand narrative. With fundamentals pointing to a tighter market, the Zacks Consensus Estimate for the average sales price for crude oil in first quarter 2018 is $61 per barrel, up from $45 a year earlier.

Though the company maintains an oil-heavy production mix, natural gas still contributes around 40% to the total volume. This healthy exposure to natural gas could also work in Chevron’s favor as the price of natural gas have gained ground compared to year-ago levels. We expect natural gas price to average $5.03 per thousand cubic feet in the March quarter, up from $4.36 in the first quarter of 2017.

Chevron, like most of its peers, is set to benefit from the spike in crude and natural gas prices.

Higher Production to Further Aid Upstream Income Generation

Chevron’s existing oil and gas development project pipeline is among the best in the industry, driven by the big Australian LNG projects (Gorgon and Wheatstone), as well as deepwater developments in the U.S. Gulf of Mexico and the Permian operations. Reflecting the ongoing ramp up, our model estimates first-quarter production volumes at 2,826 MBOE/d, improving from 2,740 MBOE/d in the fourth quarter and 2,676 MBOE/d a year ago.

Consequently, the Zacks Consensus Estimate for the Zacks Rank #3 (Hold) Chevron’s upstream segment’s first-quarter income is pegged at $2,593 million, 70.9% higher than the reported figure in the corresponding quarter of 2017.

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

Overall Earnings & Revenue Projections

Notably for the second-largest U.S. oil company by market value after Exxon Mobil (XOM - Free Report) , the Zacks Consensus Estimate for earnings of $1.45 reflects a marginal growth from the prior-year quarter profit of $1.41. Also, the Zacks Consensus Estimate for sales of $38,740 million indicates a 15.9% increase on a year-over-year basis.

Our Take

The company’s oil and gas exploration and production earnings will likely reflect the impact of commodity prices recovering over the past few months amid improved volumes. Importantly, we expect these to translate into higher operating cash flow generation at the division. But whether a strong performance of Chevron’s upstream business will fuel earnings beat is something the investors will have to wait and watch.

Earnings Schedules of Other Oil Supermajors

Among the major integrated players, Exxon Mobil is also scheduled to release Friday, while Royal Dutch Shell plc (RDS.A - Free Report) will report tomorrow. BP plc (BP - Free Report) , another major, will report fourth-quarter earnings early next week.

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