Should You Avoid Chevron After Terrible Earnings?

Oil stocks have staged an impressive recovery over the last few months. After hitting multi-year lows of roughly $26 per barrel in the first quarter of 2016, crude prices have recovered very nicely over the last few months and are now hovering around the $45 per barrel mark.

Despite crude moving higher over the last few months, Chevron’s (CVX) Q1 results were bad, to say the least. The company’s net income plunged $0.39 per share, as compared to $1.37 per share in the first quarter previous year. In addition, Chevron’s top-line also dropped almost 32 percent year over year to $23.56 billion as well as the company’s upstream segment lost $1.46 billion.
However in spite of all the headwinds, the company’s stock has held up quite well seeing the results.

While Brent crude prices were hovering around $34 per barrel in the first quarter, the price now stands at $49.07 per barrel. Keeping in mind the enhancing fundamentals in the segment, $40+ prices may sustain. United States oil production has retreated approximately 100,000 barrels per day per month for some months.

Given that Chevron has a yearly sensitivity of $350 million per barrel for each $1 change in the Brent crude oil price, its upstream division earnings could be $880 million healthier if Brent prices hover around $49 per barrel for the imminent quarter. Chevron’s real cash flow surge might be slightly less than what the sensitivities specify mainly because the company normally realized prices lower than Brent.

Apart from this, Chevron’s operating cash flow and earnings will also surge as more of its foremost projects will arrive. Chevron’s management anticipates to restart Train 1 at the Gorgon throughout the coming few weeks and to accomplish Train 1 gradient in the next eight months from the preliminary start-up.

At present, the rising debt is not a massive problem for the company, as it is still discreetly levered at the instant, and management is relaxed with having a debt ratio of 30 percent or a little higher than that. Chevron’s management is aggressively focused on being cash flow-neutral, as it might adjust capex in the range of $17 billion-$22 billion to balance out the cash flows to endorse neutrality.


With crude oil now stabilizing over $40, Chevron should gain more upward momentum going forward. Investors should expect Chevron to post better earnings in the next quarter. Chevron is probably the safest stock to buy to benefit from the oil price recovery and its attractive dividend yield makes the long case for it even more compelling.
Published on May 19, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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