CVX's Bearish Downstream Update - Analyst Blog

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

The company expects the upstream segment to benefit from higher commodity prices and growing production. However, the results will not include any non-recurring gains that boosted third-quarter earnings. Chevron’s downstream results are likely to be sharply lower, adversely affected by depressed refining margins.

Upstream

The best part of the update pertained to upstream volumes, highlighting Chevron’s attractive growth profile among the super-majors. The company reported that oil and natural gas production averaged 2.773 million oil-equivalent barrels per day, more than 9% above the fourth-quarter 2008 level. Compared to the third quarter of 2009, production would be up by about 3%.

In the first two months of the fourth quarter, Chevron’s total domestic oil equivalent production increased 14,000 barrels per day from third-quarter levels, primarily in the Gulf of Mexico. The net international oil equivalent production was up by 57,000 barrels per day from the quarter before, mainly due to the robust liquid component whose volumes increased 42,000 barrels per day. This can be attributed to normal operations in Nigeria and the continued ramp-up of production from the expansion project at the Tengiz Field in Kazakhstan.

U.S. crude price realizations during Oct-Nov 2009 averaged $69.92 per barrel, up from $63.28 in the third quarter, while international realizations were up $6.24 to $68.14 per barrel. Chevron’s domestic realized natural gas prices for this period averaged at $3.94 per thousand cubic feet (Mcf), compared with $3.28 in the third quarter. Average international natural gas realizations were up $0.07 per Mcf to $3.99.

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 fell 50,000 barrels per day (nearly 6%) from the previous quarter, reflecting planned maintenance at the company’s El Segundo refinery in California. Ex-U.S., Chevron’s refinery crude-input volumes were down 18,000 barrels per day following planned maintenance at the Burnaby refinery in Canada. Fourth-quarter refining margins fell by $4.30 per barrel sequentially on the U.S. West Coast and 98 cents per barrel on the Gulf Coast. In recent times, Chevron has witnessed plummeting downstream profits on the back of weak demand for gasoline, diesel and jet fuel.

Chevron further cautioned that its downstream results are likely to include unfavorable timing effects due in part to the increase in crude oil and refined product prices between the beginning and end of the quarter.

Chevron plans to release its quarterly results on Jan 29, 2010.