It’s earnings season once again, so we finally get to see just how badly the recent crash in oil and natural gas prices will deflate the energy sector. And we’re about to get a real taste of that pain because the major integrated energy stocks are the some of the first to report.
On deck is venerable Chevron Corporation (CVX). As one of the largest integrated majors, Chevron earnings is crucial to watch.
With its breath of up-, mid- and downstream assets, if things are going poorly at Chevron Corp., odds are, they are going poorly everywhere else.
And given just how bad oil has dropped, things could be pretty bad for CVX and the rest of the energy sector. Investors in the energy sector should be prepared for a pretty grim report and outlook for the last quarter.
Here’s a preview of what to expect from CVX’s latest numbers.
Lower Prices Really Crimp CVX
It’s no secret that oil and natural gas prices have collapsed over the past year. What is a shocking is just how low and how long they’ve stayed that way. We’ve often mentioned “lower for longer” as the new mantra for the energy sector, but no one figured it would be this long.
And that new price dynamic is playing hardball with Chevron’s — as well as everyone else’s — profits in the sector.
This quarter should be more of the same. Chevron is expected to earn just 51 cents per share according to Thomson Reuters’ First Call estimates. That’s right, a meager 51 cents per share. Revenues for Chevron stock are estimated to be around $28 billion. At first glance, those numbers seem good: CVX is estimated to be profitable during a time when a lot of energy stocks can’t say the same.
Put those numbers in perspective, however, and the profit estimates are around 52% lower than what CVX earned in the comparable quarter last year. Going back to the fourth quarter of 2014, Chevron’s current earnings are more than 70% lower. Sales are around 40% lower.
The culprit behind that big drop continues to be the lower selling price for crude. On average, crude oil was selling for just $43 per barrel in the fourth quarter. That’s around a $7 per barrel decline vs. the third quarter of 2015.
When you are churning out hundreds of thousands of barrels worth of crude oil, that’s a big enough drop to seriously impact your bottom line. Even more so for Chevron, which is traditionally a very “oily” energy stock and receives the bulk of its production from crude.
Refining Won’t Save CVX
The second problem for Chevron is that its refining and chemicals operations won’t save it this quarter. Previously, Chevron has managed to stem upstream losses by realizing great gains in its refining segment. Lower oil prices have helped margins. That resulted in these downstream businesses earning $2.2 billion in the third quarter.
However, this might not be the case for Chevron during the latest reported quarter. Major stockpiles of gasoline — thanks to dropping demand both domestically and abroad — managed to crimp Chevron’s once fat margins. Crack spreads sank from around $16 down to just $9 during the quarter.
While that’s still pretty good for any refiner, it most likely won’t be enough to help right the ship at Chevron. After all, Chevron’s refining operations is not its bread and butter — pulling oil out of the ground is.
With both upstream and downstream operations in a funk — and it’s a given at this point — investors will be looking toward CVX’s guidance for any clues on the how the energy stock could fair in the New Year.
Unfortunately, they may be disappointed here as well.
At the end of 2015, Chevron slashed its capex budget by 24% to help reduce costs. That plays into the idea that oil prices may continue to be low for quite some time.
We’ve already seen that prediction come sort of true. Oil prices have continue to fall hard since the end of the fourth quarter. If Chevron is already seeing lower and lower profit estimates, the continued drop in crude oil should continue reduce profits even further.
That’s a huge problem when you’re already having trouble covering your dividend with free cash flows and you’re issuing debt to basically pay investors.
Analysts certainly think that Chevron will show terrible guidance figures. Many have already begun cutting their price targets to reflect lower earnings throughout the year.
For example, Credit Suisse recently slashed its price target for Chevron stock all the way down to $82. That’s basically, where Chevron stock is trading for today.
The Bottom Line: Chevron earnings aren’t going to be pretty. Both the upstream and downstream segments of its businesses should suffer. That’ll result in one of the worst quarters in recent history for Chevron.
Investors may be best suited elsewhere when it comes to energy stocks.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
