U.S. energy giant Chevron Corp. (CVX) reported a jump in its second-quarter 2011 profits, benefiting from higher oil prices and stronger refining margins.
Earnings per share (excluding adjustments for foreign-currency effects) came in at $3.89, handsomely above the Zacks Consensus Estimate of $3.55 and the year-ago adjusted profit of $2.58.
Quarterly revenue rose 30.1% year-over-year (from $53,004.0 million to $68,948.0 million) and was 7.9% above our projection.
Segmental Performance
Upstream: Chevron’s total production of crude oil and natural gas decreased by 1.9% from the year-earlier level to 2,694 thousand oil-equivalent barrels per day (MBOE/d). Volume gains in North America and contributions from the Atlas Energy acquisition were more than offset by normal field declines and the effect of higher prices on cost-recovery volumes and other contractual provisions.
The U.S. output dipped 2.0% year over year, while Chevron’s international operations (accounting for 74% of the total) experienced a 1.9% decline in volumes. Losses on the production front were more than made up by higher realized liquids prices, resulting in a 51.3% year over year rise in upstream earnings to $6,871.0 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 deepwater projects scheduled to come online during the next few years. Major start-ups during the last few months include the Tahiti and Perdido in the Gulf of Mexico, Frade offshore Brazil and Tombua-Landana in Angola.
During the second quarter, Chevron continued to progress its major capital projects, restarted important exploration and development drilling operations in the deepwater Gulf of Mexico, and acquired new upstream resource opportunities.
Downstream: Chevron’s downstream segment's earnings increased to $1,044.0 million during the quarter, from $975.0 million in the previous-year period. The improvement can be attributed to improved refined products margins and higher earnings from chemical operations (primarily from the 50%-owned Chevron Phillips Chemical Company LLC).
Capital Expenditure, Balance Sheet & Share Repurchases
The second-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) spent $8,343.0 million in capital expenditures during the quarter. Approximately 90% of the total outlays pertained to upstream projects.
As of June 30, 2011, the company had $13,335.0 million in cash and total debt of $11,520 million, with a debt-to-total capitalization ratio of about 9.1%. As part of the stock repurchase program announced in 2010, Chevron repurchased $1,000.0 million worth of shares in the June quarter.
Our Recommendation
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 of large, multi-year 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 the downside risk from continued 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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