Analyzing Chevron (CVX)

By Yaser Anwar, CSC of Equity Investment Ideas

• For 3rd Q Chevron earnings of US$5.0 billion. Upstream earnings were US$3.5 billion, up US$200 million over the same period last year. CVX’s top-line growth has been fueled by an increase in production volumes, higher prices for crude oil and natural gas liquids, better refined-product margins and rise in refinery utilization.
• Chevron’s downstream segment reported earnings of US$1.4 billion compared with only S$573 million last year, on a combination of higher US refinery utilization and better refined-product margins in most of the company’s operating areas.
• Improved technology has enabled the development of Gulf of Mexico lower tertiary plays, and on September 5, CVX successfully completed a production test of its Jack #2 well (CVX stake 50%, operator) under a record 7K feet of water and more than 20K feet of seafloor.
• The test well sustained a flow above 6K b/d, and CVX plans to drill more appraisal wells in 07. Also- During the Q, Chevron and its partners announced a successful deep water well test at the company’s Jack discovery. The well test, which was completed in 7K feet of water to a depth of more than 20K feet, was the deepest well test in the Gulf of Mexico on record.
• The well sustained a flow rate of more than 6K b/d from roughly 40% of the total net pay. The Jack discovery well was drilled in 04 and the successful test could open up a new play type in the lower-Tertiary aged zones of the deepwater Gulf of Mexico.
• CVX has iincreased in CAPEX provides further evidence that Chevron has a large inventory of development projects which should start to translate into multi-year production growth from 2nd half of 07. CVX estimates that of the $2 billion YoY increase in upstream CAPEX.
• Chevron also renewed its $5 billion share buyback program which investors should expect CVX to finish in 12-18 months. CVX hasbought back around 45% of the stock issued to Unocal shareholders. The accelerated rate should reassure shareholders that management is not looking for a high priced acquisition. Also- CVX’s operating earnings yield of 11% is quite good.
• CVX’s sequential earnings for the last 4 Qs and the current Q estimates are showing deceleration in quarterly growth rates which could lead to a decline in earnings growth over the near term. Also- Recent changes in earnings forecasts for CVX relative to other companies compare negatively. However, earnings were reported higher than those predicted in earlier estimates which may be a positive for future growth.
• Investors should understand that CVX is diversified and has a strong business profile in volatile, cyclical and capital intensive segments of the energy industry. Also that performance will depend on its ability to realize synergies following its merger with Unocal alongside- competing energy prices, high industry inventory levels, regional supply interruptions that may be caused by military conflicts or civil unrest, and production quotas imposed by OPEC.

Note: I might not have an analysis for the coming few days, as exams are upon me and got tons to study! God I hate school- I just wish I got hired right now and didn’t have to finish my degree! Thanks for reading.

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