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Here's Why Chevron (CVX) Could See E&P Earnings Fall in Q1

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Chevron Corporation (CVX - Free Report) is set to release first-quarter 2020 results before the opening bell on Friday, May 1. While the downstream side of the picture appears rather stable, sentiment across the upstream division is quite bearish.

Chevron has extensive upstream (exploration & production) 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 production of crude oil and natural gas remained essentially unchanged from the year-earlier level at 3,078 thousand oil-equivalent barrels per day/MBOE/d (61.5% liquids) – the fifth successive quarter where volumes exceeded 3 million barrels per day. Contribution from the shale assets in the prolific Permian Basin were offset by normal field declines, turnarounds and the impact of asset dispositions. The fourth-quarter average production from the showpiece Permian Basin was 514 MBOE/d, up 36% year over year.

The U.S. output rose 16.3% year over year to 998 MBOE/d but the company’s international operations (accounting for 68% of the total) fell 6.5% to 2,080 MBOE/d. For the full-year 2019, Chevron’s worldwide production averaged a record 3,058 MBOE/d, reflecting an increase of 4.4% from 2,930 MBOE/d a year ago.

Despite flat production volumes, Chevron’s upstream segment incurred a massive loss of $6.7 billion, compared with the year-ago profit of $3.3 billion. Apart from asset impairment charges, the nosedive to a loss could be blamed on significantly lower oil and gas realizations.

Commodity Prices Sink in Q1, Production up Slightly

By now it’s well documented that coronavirus induced a massive slump in oil demand amid a supply glut. With major cities under lockdown and travel restrictions in place, the consumption for crude dropped substantially during the first three months of 2020.

According to the U.S. Energy Information Administration, WTI prices started the first quarter of 2019 at around $47 per barrel and exited the period at $60 per barrel. This year, prices were just over $60 a barrel at the start of the year but plunged to $20 at the end of March.

The news is not rosy on the natural gas front either.

In Q1 of last year, natural gas prices were just under $3 per MMBtu in the beginning and fell slightly to end March at $2.7 per MMBtu. Coming to 2020, the fuel was trading at $2.2 per MMBtu in the beginning of January and struggled throughout the quarter to end at $1.64 per MMBtu.

Meanwhile, shale assets in the prolific Permian Basin will help the company ramp up its volumes. As a proof of this, the Zacks Consensus Estimate for first-quarter production is pegged at 3,083 MBOE/d, indicating an increase of 1.5% from the year-ago reported figure.

E&P Income Generation to Have Suffered

Chevron, like its peers ExxonMobil (XOM - Free Report) , Royal Dutch Shell (RDS.A - Free Report) and BP plc (BP - Free Report) , is set to have faced the wrath of plunging crude and natural gas prices in the to-be-reported quarter. While output gain is likely to have been a positive contributor to results, the historic meltdown in realizations would have pressured the Zacks Rank #5 (Strong Sell) company’s E&P segment profits.

Consequently, for the to-be-reported quarter, the Zacks Consensus Estimate for upstream unit earnings is pegged at $2 billion, indicating a decline of 35% from the prior-year quarter.

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

Overall Earnings & Revenue Projections

The Zacks Consensus Estimate is pointing toward a considerable decline in earnings. A year ago, EPS came in at $1.39 and for the first quarter of 2020, earnings are forecasted to have been 64 cents. Revenues, meanwhile, are expected at $29.9 billion – down 15.1% year over year.

Click here to know how the company’s overall first-quarter performance is likely to be.

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