Chevron Q1 Results - Bad News

| About: Chevron Corporation (CVX)


Chevron lost money in the fourth quarter of 2015.

Oil prices and crack spreads were down in the first quarter.

This means Chevron's losses for the first quarter will be higher than the company's losses in the previous quarter.

Cash burn rate remains high, despite capex cuts.

Chevron (NYSE:CVX), as most other oil companies, has been hit hard by lower oil and gas prices during the last year. The company had to report net losses for the fourth quarter of 2015, for the first time during the current cycle. I'll try to determine how much money Chevron lost during the first quarter of 2016.

During the fourth quarter of 2015, Chevron has lost $590 million, based on upstream losses of $1.36 billion, downstream earnings of $1.01 billion and other losses of $240 million. This quarterly loss is equal to a loss of $0.31 per share. During the fourth quarter, Chevron's operating cash flows (excluding working capital effects) totaled $4.2 billion, whereas Chevron's capital expenditures for the fourth quarter totaled $8.7 billion. This means that Chevron's free cash flow was negative at $4.5 billion, when we further account for $2.0 billion in quarterly dividend payments ($1.07 multiplied by 1.87 billion shares), we get to a cash burn rate of $6.5 billion for the fourth quarter. We can use these numbers in order to calculate the results for the first quarter of the current year.


Chevron's upstream business lost $1.36 billion in the fourth quarter, when oil prices were substantially higher than during the first quarter of the current year:

According to, WTI averaged $40.7 per barrel during the fourth quarter ($37.10 in December, $41.60 in November and $43.30 in October). In comparison, WTI averaged $35.20 per barrel in the first quarter of the current year ($33.70 in January, $33.90 in February and $38.00 in March). With oil prices dropping $5.50 per barrel quarter to quarter, we can assume that Chevron's upstream results will very likely be even worse for the first quarter than they were in Q4 2015. At a production rate of 2.70 million barrels of oil equivalent per day, each $1 movement in the price of oil impacts Chevron's upstream revenues by $240 million.

When we assume that production costs and fixed costs remained stable in comparison to the prior quarter, we can thus say that Chevron's upstream revenues and operating income dropped $1.32 billion ($240 million impact per $1.00 movement multiplied with $5.5 in oil price declines) in comparison to the prior quarter - Chevron's upstream losses would thus have roughly doubled from $1.36 billion to $2.68 billion quarter to quarter. If Chevron was able to shrink operating expenses or fixed costs dramatically over the last three months, the actual reported number could be better, but substantial changes in just three months are rather unlikely.


Looking at Chevron's downstream earnings for the fourth quarter, we see positive income of $1.01 billion. Downstream earnings are not dependent on oil prices, but depend on crack spreads (the price difference between the price of a barrel of crude oil and the price of the refined products derived from that barrel of crude oil). Unfortunately, Chevron's bottom line will not see a positive impact from this side of the business, either: Crack spreads are down substantially in comparison to the first quarter of 2015, and also down substantially in comparison to the fourth quarter of 2015:

Per Howard Weil's data, crack spreads for the first quarter of 2016 are below the respective crack spreads of Q4 2015 in all major markets, which includes declines of more than 20% in NW Europe, the US West Coast market and Chicago. We can thus safely assume that Chevron's downstream operations earned less money in Q1 2016 than they did in Q4 2015, but the exact amount is not easy to calculate. Chevron refines about 920,000 barrels of oil each day in the U.S., and about 780,000 barrels of oil each day in the rest of the world.

When we calculate with an average crack spread decline of $2.00 per barrel, and a daily throughput of 1.7 million barrels, we can calculate that Chevron's pre-tax profits for its downstream business will drop about $300 million. When we adjust this number for lower taxes, we can assume that lower crack spreads will have impacted net earnings of Chevron's downstream business by roughly $200 million in the first quarter, i.e. earnings will likely have dropped from $1.0 billion to $800 million.

Net income and cash flows

With upstream losses of $2.7 billion and downstream earnings of $800 million, as well as with $200 million losses for all other activities, we can assume that Chevron will likely have lost about $2.1 billion in the first quarter of 2016 - losses that are $1.5 billion higher than the losses Chevron generated in the fourth quarter of 2015.

Looking at Chevron's cash flow situation, it doesn't look too good either. Since Chevron generated $4.2 billion in operating cash flows in the fourth quarter, and its net losses will likely have declined about $1.5 billion, we can say that Chevron's operating cash flow for the first quarter will have come in at roughly $2.7 billion (since there likely are no material changes in depreciation, amortization or other non cash items, we can assume that cash flows from operations and net income move uniformly).

With Chevron's plan to spend $26.6 billion on capital expenditures this year, we can calculate with $6.7 billion in capital expenditures for the first quarter (one fourth of the total for the year), this would mean that Chevron's free cash flow for the first quarter would be minus 4.0 billion. When we again calculate in the company's dividend payments, the cash burn would equal $6.0 billion, roughly the same as in the fourth quarter of 2015, despite a huge capex cut.


We can summarize that things did not get better during the first quarter, quite the contrary: Oil prices as well as crack spreads dropped in comparison to the previous quarter, which means higher upstream losses and lower downstream earnings at the same time. The cash burn rate will likely be roughly equal to the prior quarter, despite further capex cuts.

With Gorgon likely coming online again during the current (second) quarter, things could get better over the rest of the year. Oil prices have recovered from the Q1 lows as well, but still remain below the Q4 average.

Disclosure: I/we 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.