Chevron Corporation (CVX) – the second largest U.S. oil company – reported weaker-than-expected third-quarter 2010 profits. Earnings per share (excluding foreign-currency effects) came in at $2.06, below the Zacks Consensus Estimate of $2.15. This was mainly on account of costs related to the Gulf of Mexico (“GoM”) drilling moratorium and lower U.S. volumes.
As a result, Chevron could not match the soaring profit gains posted by other integrateds, such as ExxonMobil (XOM), ConocoPhillips (COP) and Royal Dutch Shell PLC (RDS.A) though it was the latest to benefit from higher commodity prices and stronger refining margins.
On a brighter note, Chevron’s adjusted earnings per share improved 14.4% – from $1.80 to $2.06. Quarterly revenue rose 6.6% (from $46.6 billion to $49.7 billion) and was 3.3% above our projection amid stronger oil and gas realizations.
Shares of Chevron have lost more than 1.9% as of this blog post in Friday trading on the New York Stock Exchange.
Upstream
Chevron’s total production of crude oil and natural gas increased marginally (by 1.3%) from the year-earlier level to 2,738 thousand oil-equivalent barrels per day (MBOE/d), driven by volume gains in Thailand and Brazil, which were almost offset by normal field declines in the U.S. and downtime associated with maintenance and repairs.
U.S.output dipped 7.1% year-over-year though Chevron’s international operations (accounting for 75% of the total) experienced a 4.6% rise in volumes. Gains on the overseas production front were supported by higher realized oil/gas prices. However, these factors were more than offset by higher expenses, resulting in a 4.6% year-over-year drop in upstream earnings to $3.6 billion.
Production Outlook
Despite lackluster volume growth during the quarter, Chevron’s production outlook remains one of the most robust in its peer group, with a number of major deepwater projects scheduled to come online during the next few years. Major start-ups during the last few months include the Tahiti and Perdido in the Gulf of Mexico, Frade offshore Brazil and Tombua-Landana in Angola.
Recently, Chevron announced its plans to invest approximately $7.5 billion to develop two large fields – Jack and St. Malo – in deepwater GoM. The company has also acquired a 70% operated interest in three deepwater concessions in Liberia.
Downstream
Chevron’s downstream segment’s earnings jumped to $565 million during the quarter, as against a profit of $262 million in the previous-year period. The positive comparison can be attributed to improved refined products margins and higher earnings from chemical operations (primarily from the 50%-owned Chevron Phillips Chemical Company LLC), partially negated by lower refined product sales.
Capital Expenditure & Balance Sheet
Chevron spent $6.1 billion in capital expenditures during the quarter, up 33.0% from the year-earlier level. Approximately 89% of the total outlays pertained to upstream projects. As of September 30, 2010, the company had $11.0 billion in cash and total debt of $10.6 billion, with a debt-to-total capitalization ratio of about 9.4%.
New Share Repurchase Program
Chevron further informed that it will restart quarterly buybacks of up to $1 billion of its common stock starting from the fourth quarter of 2010. The San Ramon, California-based oil behemoth is targeting a quarterly repurchase rate of $500 million to $1 billion as part of a program earlier approved by the Board of Directors.
Our Recommendation
Notwithstanding the earnings disappointment, we remain encouraged by Chevron’s longer term operational outlook.
We like Chevron’s strong pipeline of development projects and impressive recent exploration successes that will drive its long-term success. The company’s high oil price sensitivity and rebounding downstream operations add to the positive sentiment.
However, production shortfalls associated with PSC (Production Sharing Contract) interest reductions, exploration results and unpredictable refining performance continue to keep us on the sidelines.
As such, we are currently Neutral on Chevron shares with a Zacks #3 Rank (Hold).
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