There are at least two factors that should haunt investors in oil company Chevron (CVX). One is on the production side and the other is the price realization in Q4. Both of these factors have played a significant role in dragging down the company's earnings in Q3. Therefore, investors are concerned about the outlook for Q4 specifically on these two factors.
While the company is hopeful of improved production in Q4 compared to Q3, analysts are expecting the company's production to become normal in Q1 2013. As far as the price realization in Q4, the U.S. Energy Information Administration's (EIA) outlook is not offering any encouragement for year-over-year improvements. The production specifications will also undergo changes in Q4 to winter grade from summer grade. Therefore, the price realization for Q4 is likely to be downward on a year-over-year basis.
The company's production dropped in Q3 as a result of Hurricane Isaac in the Gulf of Mexico, the fire in the California refinery, and investigations in Brazil regarding two oil spills. In addition, Chevron's planned maintenance in some of its global facilities has unfavorably impacted its production in Q3.
On Nov. 2, the company reported earnings that dropped 33% to $5.25 billion, or EPS of $2.69, from $7.83 billion, or EPS of $3.92. Revenues also dipped 8.2% to $56 billion from $61 billion. The company blamed weak oil price realization and a fall in production for the significant drop in earnings. Analysts were expecting Chevron to earn EPS of $2.83.
The global production was 2.52 million barrels a day in Q3, down 3.1% from last year's 2.6 million barrels a day. Production saw a further drop due to normal field declines, maintenance-related downtime, the continued shut-in of Brazil's Frade Field, and storm-related shut-ins in the Gulf of Mexico. However, increased production in Nigeria, Thailand, and the U.S. offset these weaknesses.
For the fourth quarter, Chevron is hoping for higher production compared to Q3. However, AP quoted a Morningstar analyst as saying that the overall production was reduced by 118,000 barrels a day due to damage at the California refinery crude facility from a fire that occurred in August. The analyst is reportedly expecting the unit to resume operation in Q1 only.
On the price realization front, the company's realization of a barrel of crude and natural gas liquids in the U.S. has slipped 5.2% to $91 in Q3 from $97, while the average natural gas sales price plummeted 36.5% to $2.63 per thousand cubic feet from $4.14 last year. Similarly, in the international segment, Chevron realized lower price of $98 for a barrel of crude and natural gas liquids than $103 in the previous year. However, the average sale price of natural gas rose to $6.03 per thousand cubic feet from $5.5.
Meanwhile, the EIA sees the WTI crude price averaging $93 a barrel during the second half of 2012. The EIA added that "after increasing to as high as $19 per barrel in August and September of this year, the EIA expects that the WTI crude oil spot price discount to the Brent crude oil spot price will average $17 per barrel in the fourth quarter of 2012 before falling to $9 per barrel by the end of 2013."
The independent statistics and analysis provider expects retail gas prices to start falling in October due to transitions to winter grade gas specifications from summer grade. The ETA projects retail gas prices to average $3.60 a gallon in Q4. The retail price is generally higher than what the company realizes.
Chevron realized a sales price of $101 per barrel of crude oil and natural gas liquids in the U.S. in the 2011 fourth quarter. The average natural gas sale price was $3.62 per thousand cubic feet in the same period. In the international division, the company realized $101 per barrel of crude oil and natural gas liquids, while natural gas' average sale price was $5.55 per thousand cubic feet, according to the company's results.
It is quite clear that the company will face difficulties in getting a better price, and the production woes will extend into the fourth quarter as well. This makes the near-term outlook appear sluggish for the stock. However, the stock is well positioned in the long term, as long as Chevron can execute on a slate of projects that are in its hands for development.