We are maintaining our Neutral rating on Chevron Corporation (CVX), reflecting lower-than-expected third quarter 2010 results. Higher costs incurred in association with the Gulf of Mexico (“GoM”) drilling moratorium and lower U.S. volumes have impaired the company’s performance.
3Q10 Quarter Recap
Chevron’s earnings per share (excluding foreign-currency effects) came in at $2.06, running behind the Zacks Consensus Estimate of $2.15. On a year-over-year basis, earnings moved up 14.4%.
Quarterly revenues hiked 6.6% year over year to $49.7 billion and exceeded our estimates by 3.3% amid stronger oil and gas realizations.
U.S. net oil-equivalent production dipped 7.1% from the prior year, while the international operations observed a 4.6% year over year rise in volumes.
At the end of the quarter, 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%.
Outlook
Defying the jaded volume growth in the domestic sector in the quarter, Chevron comes up with a robust production outlook supported by the number of major deepwater projects scheduled to come online over the next few years. Major start-ups during the last few months include the Tahiti and Perdido in the GoM, Frade offshore Brazil and Tombua-Landana in Angola.
Lately, 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.
Our Take
Driven by a bundle of development projects all over the globe and the exploration prospects in China, Liberia and Turkey, we believe that Chevron will be able to achieve its long-term production growth target of 4–5% per annum for 2014– 2017.
Management’s decision to restart the quarterly buyback of shares not only highlights the company’s commitment to create value for shareholders but also underlines its confidence on commodity prices.
We also appreciate Chevron’s refurbishment of its asset base through disposition of high-cost low-profit assets.
Despite all these positive aspects, Chevron fails to escape the hazards associated with an exploration and production company. The exposure to volatile oil and gas prices and complex market forces continue to remain an overhang over the company’s results.
Chevron’s business in international markets faces risks such as embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil threat. Moreover, the company also depends on property acquisitions to expand its resource base. Failure to seal lucrative deals in the future could negatively impact the growth rate.
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