Things aren’t very good at Chevron (CVX) right now, although this juggernaut of an energy company isn’t going anywhere. Still, the Chevron earnings news is bad and we need to get an idea if we are anywhere close to a bottom.
Just how bad are we talking? Consensus earnings were for $1.21 per share of CVX stock; actual earnings came in at, um … 30 cents. Yikes. You may have heard that CVX stock took $2.6 billion in write-downs (ouch!) which are required to be reported in GAAP earnings, but even adding those back in, Chevron earnings were only 97 cents per share.
We need to go into each of the company’s four segments to get the real picture of how bad things are, because there are misleading numbers in each if you aren’t aware of how CVX stock operates these days.
CVX Stock’s Ugly Earnings
We start with “upstream” operations, which basically means exploration and production. This segment lost $2.2 billion, about evenly distributed between U.S. and international. It’s depressing to see a $1.04 billion loss in the U.S. after literally a $1.05 billion profit last year. But that’s what a 51% decline in oil prices does to a company.
Now, there was a blip of good news, which is that production did ramp up about 9%. That suggests that while prices are down, demand is up, and that may offset at least some of the price decline.
That’s enough optimism. Now let’s get depressing again with the $1.2 billion loss on the international side against … a $4.2 billion profit last year. It’s enough to send oil execs jumping out windows. There’s no silver production lining here, though, as it fell 1%.
The downstream side fared better. That’s everything after the oil gets pulled from the ground or water. On the U.S. side, earnings were $731 million and that’s after backing out a huge asset sale. Last year’s Q2 also had an asset sale, so on a non-extraordinary basis, we are seeing definite improvement here. The improvement came because extra production fed into the refinery system, increasing the amount of refined product sold, which also has higher margins than upstream operations.
International downstream operations also have to be teased out. Once you remove the foreign exchange effects and the assets sales, you get core operations in great shape, up 150% to $728 million from $289 million last year. Whew!
Despite all this bad news, there’s an element here that is very heartening, and it’s why I remain eternally optimistic on “integrated energy” stocks like CVX stock: cash flow. Operationally, CVX stock put out $9.6 billion of cash flow in the first half of the year. Although that’s a 40% decline from last year, it is still an incredible amount of money.
Now, I’ve been learning more and more about companies like this in the past year as oil prices blew up. What I didn’t know about Chevron is that a lot is riding on capital intensive projects called Gorgon and Wheatstone LNG. These facilities are apparently going to be big money-makers and once they are done, CVX doesn’t have to plow cash into them as much anymore.
Those projects are why free cash flow at CVX hasn’t been what it once was.
Bottom Line: I think things are wobbly at CVX right now, but ultimately it’s a great company with good times ahead, even at these lower oil prices. I think it’s a value play, with potential downside, so if you are going to buy, open only a half position.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
