U.S.energy behemoth Chevron Corp. (CVX) reported a jump in its fourth-quarter 2010 profits, benefiting from higher oil prices and stronger refining margins.
Earnings per share (excluding adjustments for downstream asset sales and foreign-currency effects) came in at $2.49, above the Zacks Consensus Estimate of $2.39 and the year-ago adjusted profit of $1.57.
Following ConocoPhillips (COP), Chevron stepped up as the second member of ‘Big Oil’ to post solid results. ExxonMobil (XOM), BP plc (BP), and Royal Dutch Shell plc (RDS.A) are all scheduled to come out with numbers next week.
Quarterly revenue rose 11.0% year-over-year (from $48.7 billion to $54.0 billion) but was 2.2% below our projection.
Segmental Performance
Upstream:Chevron’s total production of crude oil and natural gas increased marginally (by 0.3%) from the year-earlier level to 2,786 thousand oil-equivalent barrels per day (MBOE/d), driven by volume gains in Brazil, China, Kazakhstan and Thailand, which were partially offset by normal field declines and the effect of higher prices on cost-recovery volumes and other contractual provisions.
U.S.output dipped 7.1% year-over-year though Chevron’s international operations (accounting for 75% of the total) experienced a 3.0% rise in volumes. Gains on the overseas production front were supported by higher realized liquids prices, resulting in a 16.5% year-over-year rise in upstream earnings to $4.8 billion.
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.
Importantly, following thefederal government’s decision to end its drilling moratorium in the Gulf of Mexico (GoM),Chevron has approved a couple of multibillion-dollar deepwater projects in the region. In October 2010, the company announced plans to invest approximately $7.5 billion to develop two large fields – Jack and St. Malo. In December 2010, Chevron decided to go ahead with the development of the Big Foot field.
Downstream:Chevron’s downstream segment’s earnings soared to $742 million during the quarter, as against a loss of $673 million in the previous-year period. The turnaround 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 & Share Repurchases
Chevron spent $6.2 billion in capital expenditures during the quarter. Approximately 83% of the total outlays pertained to upstream projects. As of December 31, 2010, the company had $14.1 billion in cash and total debt of $11.5 billion, with a debt-to-total capitalization ratio of about 9.9%. As part of the stock repurchase program announced earlier in 2010, Chevron repurchased $750 million worth of shares in the December quarter.
Our Recommendation
Chevron is one of the largest integrated energy companies in the world and has an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.
However, due to its integrated nature, Chevron is particularly susceptible to the downside risk from continued weakness in the global economy. We are also concerned by the company’s high level of capital spending, which may result in reduced returns going forward. As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).
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