Why Chevron (CVX) Could See Its Upstream Earnings Rise In Q4

It's earnings season again and oil supermajor Chevron Corporation (NYSE:CVX) is getting ready to release its fourth-quarter 2017 results on Friday, Feb 2. While the downstream side of the picture appears rather tepid, sentiment across the upstream division is quite encouraging.

Chevron has extensive upstream operations in all major hydrocarbon-producing regions of the world. The company is primarily involved in the acquisition, development and exploitation of crude oil and natural gas properties.

A Look at Chevron’s Upstream Performance in Q3

Chevron’s total production of crude oil and natural gas increased 8.1% compared with last year’s corresponding period to 2,717 thousand oil-equivalent barrels per day (MBOE/d). The U.S. output decreased 2.4% year over year to 681 MBOE/d but the company’s international operations (accounting for 75% of the total) was up 12.2% to 2,036 MBOE/d.

Apart from the core business in Gulf of Mexico, the rise in output could be attributed to contributions from major capital projects – Gorgon and Angola LNG – shale assets, as well as and lower downtime associated with maintenance activities.

The rise in production was supported by higher oil realizations, the result being a healthy improvement in Chevron’s upstream segment profit – from $454 million in the year-earlier quarter to $489 million.

Commodity Prices Strengthen in Q4

Benchmark crude oil prices have risen sharply over the past six months amid continued declines in domestic inventories and an improving supply-demand narrative. With fundamentals pointing to a tighter market, the Zacks Consensus Estimate for the average sales price for crude oil and natural gas liquids in fourth quarter 2017 is $53 per barrel, up from $44 a year earlier.

Though the company maintains an oil-heavy production mix, natural gas still contributes around 40% to the total volume. This healthy exposure to natural gas could also work in Chevron’s favor as the price of natural gas have gained ground compared to year-ago levels. We expect natural gas price to average $4.58 per thousand cubic feet in the December quarter, up from $4.07 in the fourth quarter of 2016.

Chevron, like most of its peers, is set to benefit from the spike in crude and natural gas prices.

Higher Production to Further Aid Upstream Income Generation

Chevron’s existing oil and gas development project pipeline is among the best in the industry, driven by the big Australian LNG projects (Gorgon and Wheatstone), as well as deepwater developments in the U.S. Gulf of Mexico and the Permian operations. Reflecting the ongoing ramp up, our model estimates fourth-quarter production volumes at 2,803 MBOE/d, improving from 2,717 MBOE/d in the third quarter and 2,669 MBOE/d a year ago.

Consequently, the Zacks Consensus Estimate for the Zacks Rank #3 (Hold) Chevron’s upstream segment’s fourth-quarter income is pegged at $1,587 million, 70.6% higher than the reported figure in the corresponding quarter of 2016 and jumping more than 300% sequentially.

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

Overall Earnings & Revenue Projections

Notably for the second-largest U.S. oil company by market value after ExxonMobil (NYSE:XOM) , the Zacks Consensus Estimate for earnings of $1.31 reflects a massive growth from the prior-year quarter profit of 22 cents. Also, the Zacks Consensus Estimate for sales of $38,740 million indicates a 23% increase on a year-over-year basis.

Our Take

The company’s upstream earnings will likely reflect the impact of commodity price gains over the past few months and improved volumes. Importantly, we expect these to translate into higher operating cash flow generation at the division. But whether a strong performance of Chevron’s upstream business will fuel earnings beat is something the investors will have to wait and watch.

(See more in Chevron Gears Up for Q4 Earnings: What's in the Offing?)

Earnings Schedules of Other Oil Supermajors

Among the major integrated players, ExxonMobil is also scheduled to release Friday, Feb 2, while Royal Dutch Shell (LON:RDSa) plc RDS.A will report tomorrow. BP plc (NYSE:BP) , another biggie, will report fourth-quarter earnings early next week.

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