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Chevron (CVX)
Chevron Sales Soars, Net Income Falls
Chevron (CVX: Charts, News, Offers), the second-largest U.S. oil company announced today that its fourth-quarter net income dropped 37 percent. Profit fell from $4.9 billion a year earlier to $3.07 billion. This drop happened despite revenue increasing 10.3 percent to $47.6 billion, beating analysts' estimates of $40.4 billion by a wide margin. How is it possible that Chevron manages to earn less, despite the strong sales performance? What's next?
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Chevron is a worldwide integrated energy company and a part of its operations includes a refinery business. In recent months, the global refining margins took a plunge as two key factors both turn negative for the company. On one hand, the weak economy has lowered demand for gasoline and other fuel products. On another, the crude oil prices that rose faster than gasoline prices have driven up costs significantly. Putting the two together and we have a recipe for refining losses of more than $600,000 a day.
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Fortunately, Chevron's exploration and production business soften the blow with its better than expected 9 percent increase in oil and gas output during the fourth-quarter from new and expanded projects, which lifted its proved reserves by 1.10 billion barrels. Another factor that helped the company is its ongoing cost-management efforts that led to an approximately 15 percent decrease in operating, selling, general, and administrative expenses in 2009. "Our operated refineries continued to run reliably during the fourth quarter. However, this operational success did not offset the effects of low margins on the sale of gasoline and other refined products due to weak demand and excess supply worldwide," Chairman and Chief Executive John Watson said in a statement.
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As weakness in the economy and refinery business continues, it's unlikely that Chevron will be able to get out of this squeeze between rising crude oil prices and weak demand for gasoline. However, it should be in a better shape than many of its other competitors that either narrowly focused in refinery business, or solely rely on gasoline as the core product. Chevron has a strong ability to ride out the squeeze and focuses on its exploration, development, and production business -- as it is doing with its investment in the Brazil Papa Terra Project and others. And despite the natural gas negative outlook, the diversification beyond gasoline should help more than hurt the energy giant. This is especially important in non-U.S. markets where natural gas tends to replace the higher-priced gasoline in many applications.
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