Chevron's Global Reach Begins To Hurt

| About: Chevron Corporation (CVX)

By Samuel Richter

The European Union is considering sanctions on Iranian oil in a move that Iranian President Mahmoud Ahmadinejad has dismissed.

"It is the West that needs Iran and the Iranian nation will not lose from the sanctions," Ahmadinejad said.

Oil consumers may lose out as uncertainty drives up oil futures to well over $100 a barrel on the New York Mercantile Exchange.

If the sanctions pass, Chevron (NYSE:CVX) also might suffer, since it would likely face even higher oil prices that would cut into its already thinning margins. Lasted Friday, the oil company reported a 3.2% drop in profits for Q4 2011 thanks to lower prices at the pumps, which made it harder for the company to pass on higher oil costs.

Chevron is also hurting from a slowdown in refinery production as the company scaled back due to lower demand for oil and natural gas.

There are several reasons why oil consumption is down.

An unseasonably warm winter may have helped some industries, but it has hurt energy producers. Natural gas refineries have been hit hard, as natural gas prices fell due to increased production and lower demand. Since Chevron is a major producer of natural gas as well as gasoline, record low prices of natural gas also lowered the company's margins.

The warm weather is a serious concern for Chevron, since it recently increased natural gas production by 2.3% in America to 1.29 million barrels per day, and by 4.6% in international markets to 3.66 billion barrels per day. Less demand for natural gas meant that prices for the fuel fell by 12.6% in the United States market and increased by less than a percent in international markets.

The company's crude oil refining operations also disappointed the company primarily due to reduced profit margins. On a quarter-to-quarter basis, Chevron's earnings per barrel of oil and gas fell 8.9% to $23.62, while earnings from international downstream operations fell from $267 million to $143 million.

A substantial drop in domestic refining operations caused the company to post a loss of $204 million for its refinery business in last quarter of 2011, meaning it is now more reliant on international markets than ever before.

Chevron is already heavily exposed to international markets. The company gets the vast majority of its oil outside of the United States.

The reach for international markets has caused a backlash for the company. The recent addition of criminal charges to a Brazilian order to pay $11 billion in a civil lawsuit is a reminder that the multinational oil company's presence in foreign nations is provisional at best.

Ecuadorian courts would probably agree with the Brazilian official who said that Chevron acted in a "careless and irresponsible way."

Despite Chevron's insistence that Ecuador's Prosecutor General committed acts of fraud, the company may need to pay the $17.2 billion judgment after a U.S. second circuit court rejected a previous injunction absolving Chevron of any legal obligation to pay.

The ruling from Ecuador is the latest attempt to provide a legal recourse for residents after Texaco was accused of (which was acquired by Chevron in 2000) dumping wastewater into the Amazon River between 1972 and 1993.

While the growing fued between Iran and Europe could leave Chevron scrambling for new crude oil suppliers, the company also needs to be concerned about worsening economic conditions abroad. Fears of a slowdown caused by China's bursting housing bubble could hurt Chevron, which has become increasingly reliant on Asia. Last quarter, Asian refineries were the only growth market for the firm's downstream operations.

Chevron cannot afford a further hit to its already thinning refining margins, but uncertainty about European sanctions is driving crude oil prices higher and that may hit Chevron at its weakest point. Combined with a fall in natural gas demand and lower natural gas prices, the company is facing an uphill battle to maintain its profit margins, with more losses looming on the horizon.

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