Chevron: an Improving Business Makes It a Buy

Chevron (CVX) released its second quarter 2016 results on 29th July. The company reported a net loss of $ 1.5 billion or diluted earnings of negative $ 0.78 per share. This was in contrast to the positive earnings of $ 571 million or diluted earnings of $ 0.30 per share reported for the same quarter last year. Excluding the one-time and extraordinary items, like asset sale gains ($ 420 million), foreign exchange effects ($ 279 million), impairments and other charges ($ 2.8 billion), the adjusted earnings totaled $ 661 million or $ 0.35 per share.

Primarily due to weak oil prices, which have again dipped to near $ 40 per barrel after crossing the $ 50 mark, Chevron’s revenue in the second quarter declined 27 % year over year to $ 29.3 billion.

However, the analysts at the street had estimated an even worse ($ 1.22 billion more) decline in revenue. Similarly, for adjusted earnings too, the analysts had estimated only $ 0.32 cents which the company topped by 3 cents.

Upstream Segment:

The US upstream segment at Chevron incurred a loss of $ 1.11 billion all thanks to a 28 % decline average selling price per barrel of crude oil.
Chevron: an Improving Business Makes It a Buy
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Impairments and other charges were to be blamed for this loss at the upstream. These charges came as a result of a downward revision of the revenue from the expected oil and gas production which now seems insufficient to recover the costs.

Outside the US, the upstream segment incurred a loss of $ 1.35 billion in second quarter 2016 compared with a loss of $ 1.18 billion a year ago. This too can be attributed primarily to similar reasons as those behind the loss incurred in the US operation. However, they were offset by foreign currency effects which increased the earnings by $ 329 million compared to a $ 146 million decrease in the second quarter of 2015.

As shown in the table above, the average prices of both the commodities i.e. crude oil and natural gas, fell drastically from the year ago levels. That leaves only little need for further investigation regarding the shrinking top and bottom lines a Chevron’s upstream business.

Downstream segment:

On the other hand, the US downstream segment too suffered a 26.5 % decline in earnings compared to $ 731 million for the year ago quarter. The only thing to cheer about the US downstream segment was that it stayed green with positive earnings of $ 537 million in the second quarter. But the reduced margins and lower earnings from the 50 %-owned Chevron Phillips Chemical Company LLC only partially offset the decrease in operating expenses, the increase in gains on asset sales as well as a slight the sales of refined products (up 3 %) branded gasoline (up 2 %).

Outside the US, the downstream segment earned $ 741 million compared with $ 2.23 billion a year earlier. But that figure of last year includes a $ 1.6 billion gain from the sale of the company’s interest in Caltex Australia Limited. Apart from that, the international downstream earnings declined due to lower margins and negative foreign currency effects of $ 26 million. There was also a 2 % decrease in sales of refined products which sold at 1.45 million barrels per day during the quarter.

Market outlook and Chevron’s prospects:

The oil and gas prices have improved a lot from their January lows. But they have also ceased to improve now indicating that further recovery will be more uncertain and slow.

In such a condition, an oil-major like Chevron must keep a check on its cash outflow since it is not able to generate cash inflows like it did last year. For instance, the company generated only $ 5.8 billion in the last quarter compared to $ 11.6 billion in Q2 last year. However, Chevron is not looking keen on conserving cash for reinvestment. It is putting excessive pressure on its operations to cut costs and holding projects to reduce CAPEX. It spent $ 6 billion less year to date that the first half of 2015. But it is not leaving the habit of paying out huge dividends despite having to raise new debt for it.

Only a turnaround in its business structure or in the oil and gas prices could make such a splurge of dividend payments sustainable.


So if you are willing to buy for dividends, go for Chevron. But as far as the performance of the company and its cash-debt situation is concerned, no capital gains look likely for the holders of this company’s share till very far down the line.

Published on Aug 26, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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