Results revealed progress in cost-cutting that translated into an improvement in upstream earnings, despite a decline in commodity prices.
Allen Good, CFA
06:45 AM | Email Article
posted another decline in earnings during the third quarter, but results revealed progress in cost-cutting that translated into an improvement in upstream earnings, despite a decline in commodity prices. Instead, it was declines in the downstream segment that dragged on results. Total earnings fell to $1.3 billion from $2.0 billion last year, with upstream earnings rising to $454 million from $59 million and downstream earnings falling to $1.1 billion from $2.2 billion last year. Production slipped to 2.51 million barrels of oil equivalent per day from 2.54 mmboed last year, and oil and gas prices fell further, but reduced operating and tax expenses lifted upstream earnings. Downstream earnings fell on lower margins, weakness in the chemicals joint venture, and absence of gains on derivatives the year prior. Our fair value estimate and moat rating are unchanged.
Allen Good, CFA, is an energy strategist for Morningstar.
As expected, cash flow continued to fall short of covering capital expenditure and dividends for the quarter. While we expect a deficit for the full year, we still anticipate that Chevron will achieve its cash flow neutrality target of $50/barrel next year, with potential for further downside given ongoing cost deflation. Chevron is at an inflection point, with free cash flow set to rise in the coming years. Operating cash flow is set to increase as high-margin volumes from new projects ramp over the next year, resulting in peer-leading growth. Chevron expects production to step up to 2.65-2.70 mmboed in the fourth quarter, thanks in part to new project growth. Meanwhile, capital spending is set to fall to $17 billion-$22 billion from $24 billion this year. Additionally, a low-cost Permian position offers ample running room and opportunity for high return reinvestment that could ultimately result in 350 mboed of production by 2020. This combination of factors makes Chevron one of the best-positioned firms among the major integrated oils. However, we think this is already fully priced into shares.
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