Chevron (CVX) posted rather dismal results in Q3 2012, with operational disruptions caused by hurricane Isaac and refinery accidents taking their toll on both, upstream and downstream production volumes. Earnings for Q3 2012 were down by 33% over the previous year. Operational disasters aside, Chevron's performance over 2012 was significantly weighed down by weak energy prices with economic activity slowing down significantly in key energy consuming regions such as North America, Europe, and China. However, a combination of increased demand for energy driven by the Chinese economic rebound and the resumption of normal production, promises to help Chevron post improved results on Feb. 1.
Crude oil prices have remained subdued throughout 2012, leading to lower price realization on upstream operations for Chevron. The condition has been the same for natural gas, where increased production, thanks to shale and stagnating demand, have combined to create a largely unprofitable scenario for oil and gas companies. However, in the last three months of 2012, the slowdown in the Chinese economy (a key reason behind low demand) has rebounded with the country posting unexpectedly high growth. (See "Oil holds above $95, up more than 2% on week," MarketWatch, January 2013.)
This has resulted in a slight rebound in world oil demand in 2012, with the recovery period concentrated in the last two months of the year. Some increase in sales is also expected to come from seasonal demands, the colder months of November and December drive energy requirements for heating in North America and Europe. However, investors should also keep in mind that despite the rise in demand, prices for crude oil in the forth quarter have remained on par with the previous nine months, possibly a result of inventory stockpiles.
Nonetheless, Chevron's total sales volume for upstream products in Q4 2012 should be much higher than the previous quarter making up for the stagnation in average sales price.
Chevron's downstream volumes also suffered in Q3 2012 due to operational discontinuities. More importantly for investors, perhaps, is the fact that the company’s refining margins decreased during the period despite peers such as Exxon posting unexpectedly high refining margins. With the International Energy Agency (IEA) suggesting a further slump in refining margins over the last few months of 2012, there is little reason for investors to expect a very positive quarter results.
We currently have a Trefis price estimate of $115 for Chevron, which is around 5% above the market price.
Disclosure: No positions.