Chevron Earnings Are on the Upswing, but Some Questions Still Persist

By Tyler Crowe Markets Fool.com

Investors in Chevron (NYSE: CVX) are likely happy with the company's most recent earnings results: Production is up, costs are down, and capital spending is significantly lower as some major capital projects have come to fruition. This is some marked progress from the past couple years, when the company was struggling mightily with its ambitious spending plan.

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As good as investors might feel about the progress Chevron has made recently, there are still some reasons investors should be keeping a watchful eye on Chevron's earnings for the rest of 2017. Here's a breakdown of its most recent results and what investors should be looking for in the coming quarters.

Image source: Chevron.

Chevron's results: The raw numbers

Results Q1 2017 Q4 2016 Q1 2016
Revenue $33,421 $30,142 $23,553
Net income $2,682 $145 ($725)
Earnings per share $1.41 $0.22 ($0.39)

Operational cash flow

$3,879 $3,147 $1,141

DATA SOURCE: CHEVRON EARNINGS RELEASE. NUMBERS IN MILLIONS, EXCEPT PER-SHARE DATA.

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Of all the integrated oil and gas companies, Chevron's business is the most weighted toward upstream production. So as you might imagine, a return to $50 a barrel crude oil has been a nice salve for the income statement.

As is the case with any company as large as Chevron, there are some details within these earnings that are worth considering before reacting to the headline numbers. While that jump in earnings per share was a welcome sight, keep in mind that $600 million of those gains came from the sale of its Indonesia geothermal assets. If we were to pull out the gains from this sale, then Chevron's international upstream business segment would have been flat compared to the prior quarter.

The other little detail worth noting is Chevron's operational cash flow result. That $3.9 billion by itself isn't that encouraging considering that it generated similar results in the prior quarter with much lower revenues. There is a $957 million working capital build baked into that result, though. Large working capital builds in the first quarter like this are common for integrated oil and gas companies as they put their development plans in place for the year.

Looking at Chevron's various business segments, the obvious gains were in the international upstream and U.S. downstream. While those international upstream earnings are juiced a bit by asset sale steroids, U.S. downstream earnings were impressive since Chevron achieved them in what has been a weak operating environment for refiners as of late. A combination of lower operating expenses for its Richmond refinery turnaround, higher margins, and better chemical sales all led to the large gain.

Data source: Chevron earnings releases. Chart by author.

What happened with Chevron this past quarter?

  • Overall upstream production came in at 2.67 million barrels of oil equivalent per day (BOE/D). Large gains from major capital projects like Gorgon and Jack/St.Malo ramping up were offset by some production sharing contract effects in Indonesia, the sale of some assets in the US Gulf of Mexico, and natural base decline.
  • The sale of its Indonesia geothermal assets puts the companyat $2.7 billion in total asset sales since the beginning of 2016. Management hopes to unload $10 billion in assets by the end of 2018 with intentions to sell its operations in Bangladesh, South Africa, and its Canadian downstream assets.
  • The bright star in Chevron's production portfolio is its Permian Basin shale assets, which totaled about 150,000 BOE/D and are above management's projections. The companyplans to increase its total operating rigs from 12 today to 20 by the end of 2018 and grow that portion of the portfolio to 450,000 BOE/D.
  • Total capital and operational spending continue to decline. Capital spending for 2017 is on track to be 56% lower than 2014, and operational expenses are down 26%.
  • Still of concern is the fact that the company's cash from operations is still struggling to keep up with its capital spending and dividend obligations. The company was able to generate $900 million in free cash flow for the quarter, but that includes $2.1 billion in cash from asset sales. During the oil price crash, management promised investors that cash from operations would cover capital spending and dividend obligations in 2017 regardless of oil prices.

What management had to say

CEO John Watson commented on the company's progress toward reigning in spending and completing its slate of major capital projects:

We continue to make good progress on reducing our spend. Our operating expenses were reduced by about 14 percent from first quarter 2016 and our capital spending declined over 30 percent from a year ago. We started up several new projects and have all three trains at Gorgon online. We also progressed our asset sales program. The combination of these actions contributed to a cash positive first quarter.

Overall net oil-equivalent production in the first quarter increased 3 percent compared to the 2016 full year, and we are on track to meet the 4-9 percent growth goal for 2017 before the effect of asset sales.

10-second takeaway

While some of Chevron's peers are realizing the benefits of their cost-cutting measures, replenishing their cash coffers, and green-lighting new projects, Chevron is still in capital recovery mode with significant asset sales and completing its existing suite of capital projects. Hopefully, it will realize those lofty production growth goals highlighted by Watson and finally close the spending gap. Management has assured investors this will happen this year, so be on the lookout to see if the company can pull it off.

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Tyler Crowe has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.