U.S. energy giant Chevron Corp. (CVX) reported better-than-expected second quarter 2012 earnings on the back of higher refining margins. Earnings per share (excluding adjustments for foreign-currency effects) came in at $3.56, handsomely above the Zacks Consensus Estimate of $3.23.
However, the integrated supermajor’s per share adjusted profits came lower than the second quarter 2011 level of $3.89 amid a drop in volumes and crude prices.
Quarterly revenue decreased by 9.2% year-over-year – from $68,948.0 million to $62,608.0 million – and was 8.6% below our projection.
Segmental Performance
Upstream: Chevron’s total production of crude oil and natural gas decreased 2.6% from the year-earlier level to 2,624 thousand oil-equivalent barrels per day (MBOE/d). Volume gains in Thailand, U.S. and Nigeria were more than offset by normal field declines, the shut-in of the Frade deepwater field in Brazil, downtime associated with maintenance activities, and asset sale.
The U.S. output dipped 5.0% year over year, while Chevron’s international operations (accounting for 75% of the total) experienced a 1.8% decline in volumes. Losses on the production front were accompanied by depressed crude and North American gas prices, resulting in an 18.2% year over year drop in upstream earnings to $5,620.0 million.
Despite the slight dip in Chevron’s quarterly volumes, we believe its production outlook remains one of the most robust in its peer group, with a number of major initiatives scheduled to come online during the next few years. Major start-ups during the last few months include the deepwater Usan project in Nigeria and the Caesar/Tonga project in the deepwater Gulf of Mexico.
Downstream: Chevron’s downstream segment's earnings jumped to $1,881.0 million during the quarter, from $1,044.0 million in the previous-year period. The improvement can primarily be attributed to wider profit margins on refined products and the sale of its South Korean assets.
Capital Expenditure, Balance Sheet & Share Repurchases
The second-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) spent $7,826.0 million in capital expenditures during the quarter. Approximately 90% of the total outlays pertained to upstream projects.
As of June 30, 2012, the San Ramon, California-based company had $21,209.0 million in cash and total debt of $10,231.0 million, with a debt-to-total capitalization ratio of about 7.3%. As part of the stock repurchase program announced in 2010, Chevron repurchased $1,250.0 million worth of shares in the June quarter.
Recommendation & Rating
Chevron is one of the largest integrated energy companies in the world and has an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.
However, due to its integrated nature, Chevron is particularly susceptible to downside risk from any weakness in the global economy. We are also concerned by the company’s high level of capital spending, which may result in reduced returns going forward.
As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).
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