Petroleum industry leader Chevron (CVX – Free Chevron Stock Report) saw its shares rise nicely when the company reported that third-quarter profits more than doubled. Earnings jumped to $2.11 a share from $1.03 a year earlier. Our estimate was for $2.10. The company would have earned even more except for asset writedowns and unfavorable currency translation rates.
Higher oil prices were the driving force behind the upturn, of course. In the United States, the company realized an average of $62 a barrel during the quarter, up nearly 50% from $42 a barrel the previous year. Overseas, oil prices averaged $69 a barrel versus $48 a barrel in 2017. The favorable trend in oil prices had led the company to put less emphasis on natural gas drilling stateside, given weak realizations for that fuel. Meantime, capital spending is up moderately for the year, and remains highly focused (88%) on drilling operations.
Chevron did very well in the field, lifting combined oil and natural gas production 9%, year over year, to a record level. The story here is that the company has completed a couple of large projects and is now harvesting the fruits of its investments. That is strongly the case in the Unites States, where production rose 22%, driven by increased activity in the Permian Basin of Texas and New Mexico. Production internationally was lifted modestly by the ramp up of the Wheatstone LNG facility in Australia. On the plus side, combined production is set to rise at a mid-single-digit rate for a couple of years.
Elsewhere, the downstream business broadly held its own during the quarter. Domestic profits rose on good performance in the chemicals line and reduced taxes. International profits slipped, though, partly on lower margins. But these businesses can be considered sidelines for the company.
In the big picture, Chevron's favorable position in the industry is underscored by its ability to repurchase stock. The company bought back $750 million in shares during the third quarter as part of its $3 billion-per-year allocation. Share repurchases are often viewed as a sign that business is booming, given the excess cash available. Investors haven't completely warmed up to oil shares, such as Chevron's, though, since the sharp downturn in crude oil quotations a few years earlier is still fresh in their memories.
All things considered, Chevron's third-quarter earnings were uplifting, and offered further promise ahead if oil prices can maintain their recent range. For now, we are maintaining our view that the company can earn $7.90 a share in 2018 and improve on that total moderately in 2019. These blue-chip shares, meanwhile, offer a good yield and healthy 3- to 5-year risk-adjusted returns.
About The Company: Chevron is one of the world’s largest oil company based on proven reserves. The company’s Upstream operations consist primarily of exploring for, developing, and producing crude oil and natural gas; processing, liquefaction, transportation, and regasification associated with liquefied natural gas; transporting crude oil by major international oil export pipelines; transporting, storage, and marketing of natural gas; and a gas-to-liquids plant. Downstream operations consist primarily of refining crude oil into petroleum products; marketing of crude oil and refined products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses, and fuel and lubricant additives.
- Robert Mitkowski
