Earnings season is well underway and for the energy sector that means that the big boys — the integrated giants — are up to bat first. And you can’t really get much bigger than Chevron (CVX).
Featuring an enviable asset base and huge production numbers, CVX is one of the biggest energy stocks on the planet. So if CVX is having some major issues, then the many smaller players in the oil patch could be suffering even more.
And it looks like they will. Oil prices haven’t exactly cooperated over the last three months.
However, CVX has some very specific problems that could raise their ugly heads during the firm’s latest conference call and earnings release. Investors looking a CVX stock should be prepared.
Here’s a preview of what to expect from CVX’s latest numbers.
A Huge Decline for Chevron Stock
It seems that “lower for longer” is coming true for the energy sector. Prices for both crude oil and natural gas continued to implode over the last three months. Since last year, prices for crude oil have slipped around 55%, with the third quarter seeing the vast bulk of that drop.
That decline is kind of problem if you rely on those prices for your profits.
For CVX, the picture isn’t going to be a pretty one when it reports earnings this Friday. When it comes to the major oil stocks, CVX is very “oily” when it comes to production. Lower crude oil prices will hurt its bottom line more than some of its rivals.
Analysts expect Chevron stock to earn profits of only 76 cents per share and realize revenues of $29.76 billion.
Those numbers on first glance seem good. CVX is estimated to be profitable — a lot of energy stocks currently can’t say that. But in context of previous quarters, they are downright abysmal. Perhaps even more so, when the last reported quarter was already considered one of the worst for CVX in recent memory.
That revenue estimate is around 35% lower than what CVX recorded last quarter and roughly 45% lower when looking at the third quarter of 2014. Profits show an even larger drop for the integrated giant. Last year at this time — when oil prices were much higher — CVX earned a whopping $2.95 per share.
If Chevron hits estimates it’ll record a massive, nearly 75% drop in year-over-year profits.
Refining Could Save CVX
The key for Chevron, as well as the rest of its integrated rivals, has been its downstream sector. Downstream operations can benefit from lower crude oil and natural gas prices as their refining margins increase on the lower input costs.
Over the last few quarters, refining and its chemicals joint venture with Phillips 66 (PSX) has saved Chevron’s butt from the fire. Last quarter, CVX saw its upstream operations lose about $3.8 billion. Refining made profits of around $1.5 billion. That helped CVX average out to a slight gain in net income for the quarter.
It’s not inconceivable that refining will come to Chevron stock’s rescue again and possibly help the firm on the earnings front. With commodity prices even lower, its downstream operations should be able to feast on the margins. But it probably won’t be enough, as CVX’s refining operations aren’t its bread-n-butter.
But Still Some Major Issues
Perhaps the biggest lingering issue facing CVX is its lack of free cash flows.
Over the last few years that number has been negative. The reason for that has been Chevron’s penchant for undertaking very large projects to fuel its dwindling production growth. Several of these — such as its Gorgon LNG project — are still sucking capex spending and hurting cash flows.
The problem is that all of this was going on when oil was much higher. When your cash flows are already limited because you are earning less per barrel, any additional issues aren’t going to be welcome.
While CVX has promised to sell some assets, cut spending and reduce “big project” exposure, the bleeding should continue this reported quarter. That’s not going to provide investors any comfort — especially when considering it’s free cash flows that pay dividends and funds lucrative buyback operations.
Get Ready For Some Pain
At the end of the day, no one expects CVX to report a boffo quarter. Oil prices are just too low for it to succeed like it did a few years ago. The question is just how bad it will do. The hope is that refining will balance out some of the pain from poor upstream earnings. Guidance — especially on the cash flow and dividend front — will be key for Chevron stock.
Given the risks, it may be time to pass on Chevron until it really gets its act together.
As of this writing, Aaron Levitt was long the Vanguard Energy ETF (VDE), which holds CVX stock.