Why Chevron Is a Short?

Chevron’s (CVX) performance in third quarter, 2015 was weak. The quarter delivered falling revenue and earnings. The quarter’s performance was heavily affected by the slipping prices of crude oil. Despite of the adverse conditions that affected the company’s upstream business, the strength of the downstream business, has helped Chevron keep its earnings respectable.

Not in good shape

The total revenue and other income for the quarter slipped to $34.3 billion from $54.7 billion from the same quarter, last year, where the sales and other operating revenues dropped to $32.7 billion from $51.8 billion for the third quarter, 2014.

Moving ahead to expenses, the total costs and other deductions of Chevron went down to $31.5 billion from $45.8 billion for the third quarter 2015, which majorly includes the decline in purchased crude oil and products to $17.4 billion from $30.7 for the same quarter last year, fall in operating, selling, general and administrative expenses to $6.6 billion from $7.5 billion for the same quarter last year and fall in taxes other than on income to $2.8 billion from $3.2 billion for the previous year’s same quarter.
Additionally, in the phase of changing environment of crude oil price, controlling the expenditures becomes the highest priority of Chevron.

The net income of Chevron slipped extensively to $2.0 billion from $5.6 billion for the same quarter last year. Furthermore, the Diluted earnings per share fell to $1.09 from $2.95, still managed to beat the analyst estimates.

In addition, the worldwide production of Chevron for net Oil and Gas fell to 2.5 MBOED from 3 MBOED for the third quarter, 2014. The liquid production for Chevron was 19% up to 1,241 thousand barrels per day from the third quarter, 2014 and the Gas production was 2% up to 6,003 thousand cubic feet per day from the same quarter, last year.

Weakness all over

Upstream Business: The worldwide net production of oil-equivalents for Chevron fell to 2.54 million barrels per day from 2.57 million barrels per day for the same quarter, 2014.

Moving forward to the U.S Upstream business, a loss of $603 million was reported by Chevron in the quarter against the earnings of $929 million for the same quarter, last year. The decline was the result of higher depreciation expenses, reduced crude oil realizations, and by the absence of profits on the sold assets.

Going ahead with the International Upstream business, the company earned $662 million in the quarter compared to $3.7 billion for the third quarter, previous year. The decline was the result of higher tax items and the reduced crude oil realizations.

Downstream Business: The U.S Downstream business had earnings of $1.2 billion in the quarter against the earnings of $809 million for the third quarter, 2014. The rise was driven by the lower tax items and by the high margin on refined product sales.

Moving ahead to International Downstream business, the earnings for the quarter rose to $962 million compared to $578 million for the same quarter last year, driven by the derivative instruments’ effect which had a favorable change and the high margin on refined product sales.

Therefore, the tough time that the company is going through, has adversely affected the company’s upstream business, but the downstream business has successfully maintained stronger margins.

Declining fundamentals

The cash flow from operating activities slipped to $15 billion in the current nine-month period from $25 billion for the same period, last year, which includes operating working capital of $2.3 billion for the first nine month of 2015, of $376 million for the third quarter, 2015. Further, the cash and cash equivalent were $13 billion at the end of September, 2015 compared to $12.7 billion at the end of December, 2014.

Chevron’s has trailing PE/E ratio of 21.01 and the forward P/E ratio of 23.60, showing the company’s falling earnings. The PEG ratio is -3.94, as a result of company’s forecasted negative earnings. Also, the Price/Sales ratio is 1.35 and the Enterprise Value/Revenue is 1.48.

Conclusion

To wrap up, the third-quarter 2015 performance was weak, which was adversely affected by the falling prices of crude oil and natural gas. The quarter delivered strong margins for downstream business but weak margins for upstream business. The quarter included fall in revenue and net income. The Diluted earnings per share slipped to $1.09 from $2.95 for the third quarter, 2015. The quarter posted low forward P/E ratio along with negative PEG ratio. The sales are forecasted to be negative for the fourth quarter, 2015.
Published on Dec 21, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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