In the grand scheme of things, the sizable pullback in the top and bottom line for Chevron Corporation (CVX) came as no real surprise. Peers and rivals ConocoPhillips (COP) and Total SA (ADR) (TOT) both reported similar setbacks earlier this week, and Exxon Mobil Corporation (XOM) posted much weaker year-over-year quarterly numbers along with Chevron before Friday’s opening bell.
The shrinking revenue and income numbers, of course, are simply a function of stunningly weak crude oil and natural gas prices during the first quarter of the year.
What did come as a surprise to CXV shareholders, though, was the size of the per-share loss Chevron booked for the prior quarter.
CVX First-Quarter Earnings
In its fiscal first quarter of 2016, oil giant Chevron lost $725 million, or 39 cents per share of Chevron stock, on revenue of $23.6 billion. Both were well below year-ago figures of a per-share profit of $1.37 and sales of $34.6 billion. Both figures also fell short of estimates for a loss of only 17 cents per share and revenue of $24.5 billion.
The culprit: The company’s average selling price per barrel of oil and oil equivalent in the United States fell from $43 in the first quarter of 2015 to only $26 per barrel this time around. Natural gas prices fell from $2.27 per thousand cubic feet to $1.32 per thousand cubic feet. Overseas prices for gas and oil fell similarly.
Chevron’s upstream business dealt the biggest blow to the bottom line, losing $1.46 billion versus a profit of $1.56 billion in the same quarter from 20015. Its downstream division was still profitable, generating income of $735 million. Even so, that’s roughly half the profit its downstream business mustered in the same quarter a year earlier.
Operational cash flow fell from $2.3 billion a year earlier to only $1.1 billion this time around. Stripping out working capital from those numbers, cash flow fell from $4.3 billion to $2.1 billion.
Then again, operating cash flow was never presumed to be the real stumbling block.
Now What?
Giving credit where it’s due, CEO John Watson is handling the lingering implosion of crude oil prices as well as any investor could reasonably expect, cutting spending where it’s possible without crippling the company to the point it’s not well-positioned for an oil rebound. He explained:
“We continue to lower our cost structure with better pricing, work flow efficiencies and matching our organizational size to expected future activity levels. Our capital spending is coming down. We are moving our focus to high-return, shorter-cycle projects and pacing longer-cycle investments.”
And it’s not just rhetoric. Last quarter’s capital expenditures and exploration expenses fell from $8.6 billion to $6.5 billion. That puts the company on pace to limit its capital spending to between $25 billion and $28 billion in 2016, down by about a fourth of 2015’s capital spending total.
It’s just not enough, in light of last quarter’s weak oil prices (which have ironically rallied 18% since the end of calendar Q1 and are now up 48% since February’s low).
Although it would make Chevron stock a much easier equity to handicap if there was a clear-cut number, the breakeven oil price for Chevron is elusive (not to mention a moving target). It is, however, closer to the current oil price near $46 per barrel than it was to the $26 per barrel price suffered, on average, during Q1. If this rally from crude holds up, the disappointing first-quarter numbers from Chevron may end up irrelevant.
On the flip side, if this crude rally breaks down and sends crude prices back to the sub-$40 level, it’s only a matter of time before something has to give for Chevron.
The dividend will likely be the first thing to go, which Chevron was recently adamant about maintaining. Also on the chopping block are some of its geothermal energy assets. Either would be a red flag that Chevron is seriously cash-strapped.
Bottom Line for Chevron Stock
Calling a spade a spade, owning CVX stock is a bet on an oil rebound. The company has pretty much done all it can do to cull expenses, and focus on near-term, fruit-bearing projects, while holding off on longer-term and/or low-payoff projects.
From here, it’s up to oil and gas prices to move back to levels that make Big Oil names like Chevron viable.
The good news is, those oil prices aren’t that far away now.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
