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Chevron Corp. (NYSE:CVX) is one of the leading integrated energy companies with a market capitalization of more than $200 billion and an international market standing. The following discussion will determine the potential impact on the future stock market performance of the company as a result of the changing industry prospects and the company's response to these changing prospects.

Company Performance and Expectations

Chevron's operating earnings are distributed among the upstream and downstream operations wherein the upstream operations generate more than 90% of the company's earnings. Further segregating the profits of the company into domestic and international segments reveals that approximately 80% of the total upstream earnings base is comprised of international operations. On the other hand 65% of the downstream earnings pour in from the domestic region.

Looking at the quarterly revenues of the company over the past eight quarters, we see that the revenue base of the company has generally followed a downward trend with the fourth quarter revenue at $53.95 billion compared to analysts' estimate of $64.93 billion. Falling short of the expectations precipitated the plunge in Chevron's stock price post earnings release.

Source: Quarterly Reports

With regards to the profits reported by the company, the plummeting revenue base led to a steep plunge in profits as well with the fourth quarter net income of the company measured at $4.9 billion compared to $7.3 billion last year. In percentage terms this reflects a drop of approximately 32%, with upstream profits declining by about 30% and downstream profits nose diving by a whopping 57%. Since upstream operations account for 90% of the company's profits, the decline in the segment's profitability had a significant impact on the bottom line of the company. That being said, Chevron's profitability has declined at a cumulative rate (OTCPK:CAGR) of 4% since the first quarter of 2012. This decline in revenues and profits is explained by two factors:

  1. Lower production volume.
  2. Decline in upstream earnings due to higher depreciation and operating costs incurred.

Despite an increase in the international oil production (2.2%), Chevron's production volume indicated a declining trend, falling by 4% domestically and 3% internationally. The company's global oil equivalent production declined from 2.67 million barrels per day during the fourth quarter of 2012 to 2.58 million barrels per day in 2013. Although the production volume increased within the US and Nigeria, the impact was cancelled out by the losses incurred by older fields.

Industry Outlook and Chevron

While studying the industry, I found that the gap between consumption and production capacity is expected to widen from here onwards with the demand for energy resources exceeding the supply. According to statistics released by HIS Energy, 90% of the known energy reserves are producing less than before. In addition to that, the discovery of new significant oil plants has come down to a standstill. Studies reveal that there have been no major oil discoveries made since 2002. The minor reserves discovered over this time period are not enough to meet the increasing global demand. This leads to my assumption that the production pattern will continue to decelerate into the future as existing reserves run out unless some major reserve is discovered. This leads me to estimate that with oil discoveries halting, it will become impossible for companies in the industry to grow their operations organically leaving them with mergers being the only opportunity to grow.

Source: Peak Oil

In addition to that, as the supply of energy resources falls short of the demand, price per barrel of oil will begin to follow a rising trend. Since prices of the upstream operations are in direct relationship to the industry price levels of crude oil and natural gas, the up-trend of prices will be beneficial to the company given that it is one of the leading oil producers around the globe.

Source: Future Timeline

It is a known fact that it is going to get harder to expand operations as we move further into the future. Given that fact, Chevron made a number of acquisitions in Australia, Iraq, and Canada in 2013. Moreover, Iraq will be the "next big thing" in the oil industry with a production volume anticipated to be more than 9 million barrels per day by 2020. The country's oil production volume is expected to show a sky rocketing growth of 30% in 2014 compared to the barrels produced in 2013.

The company expects its production volume to rise scantily (1%) in 2014 with higher growth anticipated to be realized in the years after that. As of its fourth quarter report, Chevron spent 90% of the $41.9 billion capital expenditures on upstream operation expansion. This is roughly a 23% increase in capital expenditures compared to the amount spent in 2012. The company projects it will spend about the same amount for some years to ramp up its production volume.

Final Take

With production expected to increase along with the price per barrel of oil, the top line of the company will receive a significant boost in a few years. Moreover, Chevron has already made investments in Iraq considering the fact that the country is becoming a major oil producer. An early or timely entry into a market that has historically benefited early entrants will prove to be a smart move. Besides the investment in Iraq, the company is expected to continue to make investments for several years into the future to enhance its production volume. Please note that Chevron is the second largest oil producer and its size would enable it to fight the competition from smaller companies. The company has maintained an impressive record of successful mergers and acquisitions in its history which is likely to continue to materialize under the current management. In my opinion, the company is a profitable long-term investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Chevron Is Making Long-Term Promises