U.S. energy giant Chevron Corp. (CVX) reported mixed fourth-quarter and fiscal 2011 results, riding on higher oil prices and stronger refining margins, partially offset by reduced volumes and higher operating costs.

Earnings per share (excluding adjustments for foreign-currency effects) came in at $2.61, missing the Zacks Consensus Estimate of $2.86. Quarterly results were also below the year-ago adjusted profit of $2.68.

For the full year, earnings stood at $13.38, slightly missing our projection of $13.49. Comparing year over year, earnings improved 38.1% from $9.69.

Quarterly revenue of $59,985 million was 11.0% higher than the prior-year level of $54,027 million. However, this also failed to meet our projection of $74,431 million.

Chevron generated revenue of $253,706 million in fiscal 2011, compared with $204,928 million in 2010. The fiscal result also surpassed the Zacks Consensus Estimate of $250,935 million.

Segmental Performance

Upstream: Chevron’s total production of crude oil and natural gas decreased by 5.2% from the year-earlier level to 2,641 thousand oil-equivalent barrels per day (MBOE/d). The downside was due to normal field declines and maintenance-related downtime, partially offset by strong contributions from Thailand, the United States, Nigeria and Brazil.

The U.S. output dipped 5.3% year over year and Chevron’s international operations (accounting for 75% of the total) experienced a 5.2% plunge in volumes. Losses on the production front were more than made up by higher realized crude oil and natural gas liquids prices, resulting in an 18.4% year-over-year rise in upstream earnings to $5,737.0 million.

During the quarter, Chevron further pursued oil and gas discoveries across the globe, invested in various development ventures, and acquired new upstream resource opportunities.

Downstream: Chevron’s downstream segment witnessed a loss of $61.0 million during the quarter, against earnings of $742.0 million in the previous-year period. The decline was attributed to lower refined products margins along with reduced gasoline and residual fuel oil sales.

Capital Expenditure, Balance Sheet & Share Repurchases

In 2011, Chevron incurred a spending of $29,066.0 million on capital programs. Approximately 89.0% of the total outlays pertained to upstream projects.

As of December 31, 2011, the company had $15,864.0 million in cash and total debt of $10,152.0 million, with a debt-to-total capitalization ratio of about 7.7%. As part of the stock repurchase program announced in 2010, Chevron repurchased $1,250.0 million worth of shares in the quarter.

Outlook

Chevron’s production outlook remains promising, with a number of major deepwater projects scheduled to come online during the next few years. The company is also progressing with the prominent Wheatstone liquefied natural gas (“LNG”) venture in Australia.

We believe that Chevron, based on its Wheatstone project coupled with the other major Gorgon Project, will hold the leadership position among natural gas and LNG suppliers in the Asia-Pacific belt. These massive resource ventures aim at providing considerable economic benefits such as employment, government revenue and local business opportunities.

We also appreciate Chevron’s initiatives to trim its less lucrative refining/marketing operations and concentrate on the high profit generating exploration and production business. In this regard, the company is already in the process of selling various downstream properties in more than 20 counties, including Spain, Caribbean and southern Africa.

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 of large, multi-year projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers that help it to capitalize on investment opportunities as well as pursue 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 and competition from peers like BP plc (BP) and ExxonMobil Corporation (XOM).

As such, we see the stock performing in line with the broader market and are maintaining our long-term Neutral recommendation.

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