Chevron Q1 2016: What To Expect

| About: Chevron Corporation (CVX)

Summary

Chevron is scheduled to report its first-quarter 2016 financial results on Friday, April 29, before market open.

According to 17 analysts' average estimate, Chevron is expected to post a loss of $0.15 a share, a $1.22 decline from its actual earnings for the same quarter a year ago.

As I see it, the worst for oil prices is over, and the recovery in crude prices could continue.

Chevron is more oil weighted in its revenue stream than its major competitors. Hence, it is poised to achieve higher price appreciation when oil prices recover than its major competitors.

While waiting for a significant recovery in the price of oil, investors can enjoy the generous dividend currently yielding 4.20% a year.

Oil prices soared last week as the collapse of the Doha meeting turned into a distant memory. That has strengthened my belief that the worst for oil prices is over, and the recovery in crude prices could continue. According to oilprice.com, the fundamentals for oil prices are moving in the right direction, and the outcome of Doha meeting does not matter because market forces are doing what they always do. Oil supply and demand will be back in balance by the end of this year regardless of what OPEC does.

Brent crude oil increased 4.7% last week to $45.11 per barrel, an upside of 49.7% from its 12-year low on January 20, while WTI crude oil climbed 4.8% last week to $43.73 per barrel, an upside of 37.6% from its January 20 low of $31.77.

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Brent Crude Oil, June 2016 Leading Contract With 50-Day Moving Average

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WTI Crude Oil, June 2016 Leading Contract With 50-Day Moving Average

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Charts: TradeStation Group, Inc.

As a result of last week's surge in oil prices, the prices of all five supermajor integrated oil & gas companies rose sharply, 3.63% on average. Chevron (NYSE:CVX) showed the highest increase last week among the five supermajors at 4.92%. However, only Exxon Mobil (NYSE:XOM) and TOTAL (NYSE:TOT) among the group have achieved a positive return in the last 52 weeks (including dividend), as shown in the table below.

Since the beginning of the year, CVX's stock is up 13.4% while the S&P 500 Index has increased 2.3%, and the Nasdaq Composite Index has lost 2.0%. However, since the beginning of 2012, CVX's stock has lost 4.1%, while the S&P 500 Index has increased 66.3%, and the Nasdaq Composite Index has risen 88.3%.

CVX Daily Chart

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CVX Weekly Chart

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Charts: TradeStation Group, Inc.

Chevron is scheduled to report its first-quarter 2016 financial results on Friday, April 29, before market open. According to 17 analysts' average estimate, Chevron is expected to post a loss of $0.15 a share, a $1.22 decline from its actual earnings for the same quarter a year ago. The highest estimate is for a profit of $0.44 a share while the lowest is for a loss of $0.63 a share. Revenue for the first quarter is expected to decrease 38% year over year to $21.43 billion, according to 3 analysts' average estimate. There was one up revision during the last seven days, and seven up revisions and one down revision during the last 30 days. Chevron missed the estimate by a big margin in the fourth quarter of 2015, after significantly beating expectations in the prior quarter, as shown in the table below.

Data: Yahoo Finance

Historically, most of Chevron's earnings came from upstream operations, as shown in the chart below. Upstream operations accounted for 87.3% of total earnings in 2011, 84.7% in 2012, 90.3% in 2013, and 79.6% of total earnings in 2014. However, in 2015, all the earnings came from downstream operations. As such, we can expect a significant price appreciation in CVX's stock when oil prices recover, probably higher than that of other supermajor oil & gas companies due to its bigger historical upstream contribution. Oil prices will eventually recover sooner or later. Commodities prices are moving in cycles, and lower capital expenditures on exploration and production will eventually cause oil prices to recover.

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Source: Company's reports

Dividend

While waiting for a significant recovery in the price of oil, investors can enjoy the generous dividend currently yielding 4.20% a year. The company has been paying dividends since 1970, and it has a long record of 28 years of continued raising of its dividend. The annual rate of dividend growth over the past three years was at 6.8%, over the past five years was at 8.5%, and over the last ten years was at 9.4%. Even during the global economic crisis of the years 2008-2009, the company continued to raise its dividend. As such, it is hard to believe that Chevron would break that many years of tradition. What's more, the company's recent steps to reduce capital expenses and the fact that CEO Watson reiterated the importance of dividend growth and maintaining a strong balance sheet, makes me believe that the dividend payment is sustainable.

CVX Dividend Chart

CVX Dividend data by YCharts

Chevron's free cash flow has been negative for all 2015's quarters. Total cash flow from operating activities in the last quarter of 2015 was at $4,215 million, capital expenditures were at $7,766 million, which made the free cash flow negative at -$3,551 million. However, since maintaining and growing the dividend is the company's number one financial priority, it can fund the dividend by taking on additional debt, divesting assets, and drawing down its cash balance. Chevron had cash and cash equivalents of $11.02 billion at the end of the fourth quarter, and total debt of $38.59 billion consisting of short-term debt of $6.58 billion and long-term debt of $32.01 billion. Furthermore, the company has suspended its $1.25 billion quarterly share buyback to conserve cash. Also, the company expects to reduce capital expenditures in 2017 by about $4 billion due to completion projects under construction.

Summary

Chevron is scheduled to report its first-quarter 2016 financial results on Friday, April 29, before market open. According to 17 analysts' average estimate, Chevron is expected to post a loss of $0.15 a share, a $1.22 decline from its actual earnings for the same quarter a year ago. As I see it, the worst for oil prices is over, and the recovery in crude prices could continue. Chevron is more oil weighted in its revenue stream than its major competitors. As such, in my view, it is poised to achieve higher price appreciation when oil prices recover than its major competitors. While waiting for a significant recovery in the price of oil, investors can enjoy the generous dividend currently yielding 4.20% a year. The company has been paying dividends since 1970, and it has a long record of 28 years of continued raising its dividend.

Disclosure: I am/we are long RDS.A.

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.