Downstream to Lift Chevron Earnings - Analyst Blog

U.S. energy behemoth Chevron Corp. (CVX) released its second-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 to benefit from improved margins at its downstream segment, somewhat offset by lower oil and gas liftings. The San Ramon, California-based integrated major further informed that second quarter results will be boosted by a stronger U.S. dollar. Additionally, Chevron expects net after-tax charges associated with corporate and other activities to come in below its forecast of $250 million to $350 million.

Upstream

The company reported that oil and natural gas production averaged 2.744 million oil-equivalent barrels per day, nearly 3% above the second quarter 2009 level. The positive update highlights Chevron’s attractive growth profile among the super majors. However, production would be down marginally (by approximately 1%) from the first quarter 2010 level, reflecting reduced domestic as well as overseas volumes.

In the first two months of the second quarter, Chevron’s total domestic oil equivalent production decreased 20,000 barrels per day from first-quarter levels, primarily due to small declines across a number of assets. The net international oil equivalent production was down by 19,000 barrels per day from the quarter before on the back of planned maintenance in Kazakhstan and Canada , somewhat offset by a continued production ramp up in Brazil.

U.S. crude price realizations during April-May 2010 averaged $75.17 per barrel, up from $73.32 in the first quarter 2010, while international realizations were up $3.19 to $73.24 per barrel. Chevron’s domestic realized natural gas prices for this period averaged at $3.96 per thousand cubic feet (Mcf), compared with $5.29 in the first quarter. Average international natural gas realizations were down $0.16 per Mcf to $4.45.

Downstream

Regarding downstream operations (chemical and refining), the second-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) said that its U.S. refinery crude-input rose 28,000 barrels per day (more than 3%) from the previous quarter, following the planned first quarter maintenance. Ex-U.S., Chevron’s refinery crude-input volumes were down 74,000 barrels per day, pulled down by planned maintenance at the Cape Town refinery in South Africa.

Second quarter refining margins increased $3.26 per barrel sequentially on the U.S. West Coast and $4.83 per barrel on the Gulf Coast . This will help Chevron’s downstream segment to achieve significantly higher results than the previous quarter. In recent times, Chevron has witnessed plummeting downstream profits on the back of weak demand for gasoline, diesel and jet fuel.

Chevron’s first quarter downstream results included a severance charge of $150 million, as it cut jobs to realize savings in its refining operations. In view of the sharp downturn suffered by the company’s 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 July 30, 2010, before the start of trading. The Zacks Consensus Estimate for Chevron’s second quarter is $2.10 per share, higher than the earnings of $1.10 in the year-ago period but below the first quarter 2010 profit of $2.46.