Chevron (CVX) is one of the leading integrated energy companies in the world. Fortune magazine ranks it as the third largest company in the United States and the tenth largest company in the world. The company operates within all aspects of the energy business ranging from petroleum to chemicals to energy services. It also engages in the exploration, development and production of crude oil and gas. In comparison with its immediate peer group, Chevron boasts the highest earnings per barrel.
The company's results for the second quarter show net earnings of $7.2 billion (EPS of $3.66 per diluted share) against $7.7 billion (EPS of $3.85 per diluted share) for the same quarter in the previous year. Total revenues were $60 billion against $67 billion on a year-on-year basis. EPS were well in excess of the consensus estimate of $3.24 per diluted share and reflects a strong performance in a soft oil and gas market. The net oil-equivalent production was 659,000 barrels per day in the quarter to 5% decline from the same quarter of the previous year. The decrease in production was mainly because of normal field declines and the absence of production from assets sold in the previous year. This decline was partially compensated for by increased production at the Perdido and Caesar/Tonga projects in the Gulf of Mexico. The net liquids component of oil-equivalent production dropped by 4 percent to 461,000 barrels per day, while net natural gas production decreased 9 percent to 1.19 billion cubic feet per day.
In the light of prevailing market conditions, the performance can be regarded as satisfactory. It is worth noting that all the upside for the quarter basically came from downstream refining and marketing operations. Adjusted upstream earnings fell 15% from the previous quarter and missed the consensus estimates because profits were hurt by falling oil prices and flat production so that volume could not compensate for price. In comparison, refining and marketing earnings were well above expectations and doubled in comparison to the previous quarter. Upstream operations in the United States earned $1.32 billion against $1.85 billion on a year-on-year basis. Average oil prices for the quarter were $97 per barrel compared to $104 a barrel while natural gas prices halved to $2.17 per thousand cubic feet. Earnings from upstream operations declined modestly from $4.92 billion to $4.3 billion helped by an increase in natural gas prices. Profits from refining and marketing came in at $1.88 billion which was 80% more than the previous year and included asset disposals in South Korea Chevron remains a highly profitable energy producer and only comes behind Petrobras (PBR) while being ahead of other competitors such as Exxon Mobil (XOM) and Hess (HES).
Chevron ended its second quarter with roughly $21.5 billion in cash, equivalents and marketable securities. It operated with $10.2 billion in short and long term debt for a net cash position of $11.3 billion. This puts it in a strong financial position to implement any growth plans that it may have. Chevron has followed Exxon and Marathon (MRO)) into the Kurdistan region of Iraq, having acquired an 80% interest in the Sarta and Rovi blocks (Austrian energy company OMV (OTC:OMVKY) owns the other 20%). As a result, the Iraqi government has banned Chevron from operating in the rest of Iraq but this will have no impact since it has no operations in the rest of Iraq. It has had oil spill problems in Brazil but has been permitted to restart operations. It also has a lot of liquid rich assets because of its sizable holdings in the Utica, Marcellus, and Permian formations, the company is betting big in Australia with a 47% equity interest in the giant $37 billion Gorgon project as well as major drilling projects. Unlike the US, the global gas market continues to be lucrative and building LNG infrastructure will definitely pay off in the long run.
Just a couple of days ago, the company had a huge fire at its refinery in Richmond, California. The facility produces 245,000 barrels per day and accounts for around 10% of the refining capacity on the US West Coast. The main fire has been extinguished though it may be some months before regular production is resumed. There were no deaths and the result is likely to be an increase in gas prices in California. It is too early yet to assess the impact on the company, but its enormous financial strength should enable it to cope.
It is hard not to conclude that Chevron probably represents the best investment currently in the energy sector. Other energy giants like Exxon and Royal Dutch Shell (RDS.A) are formidable competitors but I believe that Chevron has some factors that make it a superior investment. For instance, it has a strong balance sheet, exceptional profitability per barrel, an attractive dividend yield in the region of 3% and its gas business is overseas where prices are higher than the US.
At about $26 per barrel, the margins were about $7 per barrel higher than the other energy companies. The company is spending $3 billion on new sites in the Gulf of Mexico and it has recently announced yet another discovery in the Carnarvon Basin of Australia. It is also pursuing unconventional energy plays in the Permian Basin and the Marcellus shale as well as Canada, Argentina, China and Poland. The company has announced that it will continue with the development of the Lianzi field, which is located in an offshore zone between the Republic of Congo and the Republic of Angola. The field is located about 65 miles offshore and is likely to involve capital expenditure of $2 billion. Development of the field, which is located about 65 miles offshore, is likely to involve an expenditure near $2 billion. At the same time, the company will spend $500 million to boost its natural gas production in Bangladesh.
I believe that Chevron should be an anchor stock in any energy portfolio and have no hesitation in recommending it if you have an interest in energy investment.