Chevron: Bullish Downstream Update - Analyst Blog

U.S. energy behemoth Chevron Corp. (CVX) released its first-quarter 2010 interim update, covering the first 2 months of the quarter. On the whole, the update is on the bullish side, with earnings expected to be higher than the previous quarter.

The company expects the upstream segment to benefit from higher commodity prices, somewhat offset by lower liquids liftings. More importantly, Chevron’s downstream results are likely to return to profit, buoyed by improved refining margins.

Upstream

The company reported that oil and natural gas production averaged 2.763 million oil-equivalent barrels per day, nearly 4% above the first-quarter 2009 level. The positive update highlights Chevron’s attractive growth profile among the super-majors. However, production would be down marginally (by about 1%) from the fourth quarter 2009 level, reflecting the absence of a royalty settlement that lifted the previous quarter’s figure.

In the first two months of the first quarter, Chevron’s total domestic oil equivalent production decreased 20,000 barrels per day from fourth-quarter levels, primarily in the Gulf of Mexico. But the net international oil equivalent production was up by 5,000 barrels per day from the quarter before.

U.S. crude price realizations during Jan-Feb 2010 averaged $72.75 per barrel, up from $70.28 in the fourth quarter 2009, while international realizations were up $0.92 to $69.34 per barrel. Chevron’s domestic realized natural gas prices for this period averaged at $5.64 per thousand cubic feet (Mcf), compared with $4.23 in the fourth quarter. Average international natural gas realizations were up $0.43 per Mcf to $4.58.

Downstream

Regarding downstream operations, the second-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) said that its U.S. refinery crude-input rose 35,000 barrels per day (more than 4%) from the previous quarter, following planned fourth quarter maintenance at the company’s El Segundo refinery in California. Ex-U.S., Chevron’s refinery crude-input volumes were up 17,000 barrels per day, driven by higher crude inputs at affiliate refineries in South Korea and Thailand.

First-quarter refining margins increased $1.21 per barrel sequentially on the U.S. West Coast and $5.26 per barrel on the Gulf Coast. This will help Chevron’s downstream segment to turn the corner and return to profit during the first quarter. In recent times, Chevron has witnessed plummeting downstream profits on the back of weak demand for gasoline, diesel and jet fuel.

Chevron further informed that its downstream results are likely to include a severance charge of $150 million, as it cuts 2,000 jobs in 2010 to realize savings in its refining operations. Also, this is the first quarter since Chevron included its chemical business within the refining operations in order to reduce costs.

In view of the increasingly bearish outlook for the marketing and refining operations, Chevron has decided to streamline its downstream portfolio, a plan that has been followed by several other oil majors, including Royal Dutch Shell PLC (RDS.A) and ConocoPhillips (COP).

Chevron plans to release its quarterly results on Friday, Apr 30, 2010, before the start of trading. The Zacks Consensus Estimate for Chevron’s first quarter is $1.66 per share, higher than the 72 cents earned in the year-earlier period and $1.57 in the previous quarter.