Chevron - Steady As She Goes, No Real Surprises In Second Quarter Update

| About: Chevron Corporation (CVX)


Chevron issues second quarter interim update.

No shocking trends, earnings are up on a sequential basis, international production is a little soft.

Long term trends remain favorable amidst 2017 production targets, solid financial position and fair valuation.

Shares of Chevron (NYSE:CVX) gave up some ground on the final trading day of the week following a continued correction in oil prices and the company's interim update for the second quarter performance.

While quarterly earnings can be volatile at oil majors, I tend to look at the longer trends which remain favorable, while not giving much attention nor weight to the volatile short term earnings. For the long run, Chevron remains a world-class stock to invest in.

Updating On The Second Quarter

Chevron announced that it sees second quarter earnings to come in above the profitability achieved in the first quarter. While this sounds very promising, the quality of this achievement is up for debate.

Recorded gains on asset sales and the absence of major impairment charges are the reasons for the sequential increase in earnings, offset by higher foreign exchange losses. Asset gains are seen between $500 and $600 million in the quarter driven by sales of the assets in Chad. This is offset by $400-$500 million in ¨all other¨ charges and FX losses anticipated to come in between $250 and $300 million.

The company stresses that these comments are made based on the performance of the first two months of the second quarter.

Domestic Production Up, International Is Down

Like most of the oil majors, Chevron is increasing its focus on its domestic operations which is paying of to some extent. First quarter liquids production rose by 5.0% to 460k barrels per day. Natural gas production, in terms of oil-equivalent was up by 1.5% to 205k barrels. Note that gas prices fell by 14% in the second quarter on a sequential basis after the cold winter which pushed up prices earlier this year.

Less maintenance activity in the Gulf of Mexico and the continued ramp-up of operations in the Permian Basin were behind the increase in production.

The good news for the international operations is that prices for both liquids and gas were stable, yet production was down. The shutdown of the LNG facility in Angola and the turnaround activity in Kazakhstan were drivers behind the decline in production levels. Liquids production fell towards 1.25 million barrels per day, down 2.1% compared to the year before. Gas production was down by 3% to 653k barrels of oil equivalent.

The refining business showed a mixed picture as well. Domestic refining throughput was under pressure due to the turnaround activity at the El Segundo refinery, just at a time when domestic margins were improving. International margins were stable as throughput increased on lower maintenance activity.

Recent Overview, Strategy Reiteration

Last month, Chevron held a big investor presentation updating the market on its strategic progress along the long term strategy. The company stressed that production in maturing fields for the entire industry is declining, requiring $7-$10 trillion in new investments by 2030 to meet global demand.

The company once more reiterated its intentions to maintain and grow dividends, operate with a solid financial position, continue to fund future capital expenditures and return any leftover cash to investors.

For the period 2014-2016 roughly a third of capital expenditures is targeted towards North America, a similar amount to Asia-Pacific, while the remaining cash is invested in EMEA and Latin America. The company invests in a wide range of exploration and production techniques including LNG, deepwater, shale, upstream ¨base¨ and other upstream, among others.

Overall capital expenditures are however anticipated to come in around $40 billion on average for this period, after peaking at nearly $42 billion in 2013. Note that the budget for 2014 stands at ¨only¨ $35.8 billion, which is still close to $100 million per calendar day!

All of this should result in increased production and profit growth. From a base of 2.6 million barrels per day by 2013, production is expected to increase towards 3.1 million barrels by 2017 driven by Permian, Wheatstone, Mafumeira Sul, Gorgon and Big Foot, among others. Further growth is anticipated thereafter, but has not been quantified yet.

The Gulf of Mexico is a key area with ¨Jack¨ starting up this year having a total production capacity of 177k barrels per day. The Tubular Bells should be able to produce 44k barrels on a daily basis and is anticipated to start production in the third quarter of this year. Big Foot will come online in 2015, adding another 79k barrels in daily production capacity.

Other progress comes of course from the Gorgon project in Australia which is 80% completed and is expected to start operating by middle of 2015.

The resulting anticipated increase in operating cash flows, combined with moderating capital expenditures should boost free cash flows and allow the company to return more cash to investors.


At the start of May, Chevron released its first quarter results. The company ended the quarter with $16.2 billion in cash, equivalents and marketable securities. Total debt of $23.1 billion was sizable, but results in a net debt position of roughly $7 billion, the equivalent of about 4 months of earnings.

On a trailing basis, the company has now posted sales of $225.3 billion on which it net earned $19.8 billion. Trading at $128 per share, equity in the firm is now valued at $244 billion, the equivalent of 1.1 times sales and 12-13 times trailing earnings.

The company's quarterly dividend of $1.07 provides investors with an attractive dividend yield of 3.3%.

Looking At The Historical Performance, And Future perspective

Over the past decade, Chevron has grown revenues at a very modest compounded annual growth rate of about 4%, increasing sales from roughly $150 billion to about $225 billion. Of course a lot of this growth was driven by higher prices, instead of real production growth.

Earnings have grown at similar rates, as both sales and earnings remain far below their peak level of 2011 when earnings approached $27 billion. On top of the reported sales and earnings growth, investors have of course always received a compelling dividend, while the company has furthermore retired about 10% of its outstanding share base over this time period.

Note that Chevron has built up a modest net debt position recently, after operating with a small net cash position in recent years. This was of course driven by the continued payouts to investors and the very high capital expenditures which peaked at $41.9 billion in 2013.

With CAPEX anticipated to fall to about $36 billion this year, while operating cash flows are on the rise, the company should be able to boost its free cash flows going forwards, allowing Chevron to slowly deleverage again.

Given the cumulative 20% anticipated production growth from now until 2017, sales could come in around $275 billion assuming similar prices, while earnings could improve to $25 billion. That would value shares at just 10 times earnings while a modest pace of production growth and energy price inflation could result in mid-single growth rates in sales going forwards.

Note that Chevron could easily continue to pay out 5% per annum to investors, being the sum of share repurchases and dividends, while operating with a very healthy balance sheet.

Final Takeaway

Despite the bright outlook for the medium to long term, shares of Chevron have hardly moved over the past year. Shares are up just 6% over the past twelve months, and are up some three percent year to date.

At current levels, shares remain in sight of their all time highs set around $133 a couple of weeks ago amidst the turmoil in Iraq. The modest returns in recent times and appealing valuation creates continued appeal in my opinion. This is of course driven by modest anticipated growth, and high payouts.

Other potential triggers could be formation of an MLP for its midstream assets, or a spin-off of the downstream activities. While such a move is not required by me, as I think that management is doing a great job at allocation capital, I acknowledge that such a move could trigger enthusiasm from investors.

I have seen recent calls for an increase in leverage as well, yet I won't be a big proponent of such a move. Chevron stresses that break-even levels for many of its activities have risen a lot and a severe oil price correction could create some operational leverage to the downside as well. This would obviously be a risk if the company would have increased leverage a lot.

I continue to like the stock, management and the balanced considerations between growth, value and shareholder payouts.

Disclosure: The author is long CVX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.