It’s unusual to see the market celebrate a nearly 40% drop in profits like they did with Chevron Corporation (NYSE:CVX) Friday. But then, these are unusual times for CVX stock.
Like the rest of the sector, Chevron has been hit hard by low oil prices. With no relief in sight investors are nervous about cash flows and the stability of dividend payments. It’s possible the oil major’s most recent results will calm down at least some of that anxiety.
Chevron stock — a component of the Dow Jones Industrial Average — put up gains of more than 5% at one point in Friday’s session. Earnings that absolutely destroyed Wall Street estimates were the proximate cause, but the market is also starting to believe that the worst might be over for CVX and its peers.
For the most recent quarter, Chevron reported net income of $1.28 billion, or 68 cents a share. That compares with the $2.04 billion, or $1.09 a share, earned in last year’s third quarter. That’s a decline a drop of 37%.
Where it gets good is when you exclude one-time items. On an adjusted earnings basis, CVX earnings came to 49 cents a share, according to a survey by Thomson Reuters. The Street was looking for 37 cents a share. That’s a big beat.
On the top line, revenue fell 12% to $30.14 billion. That was just short of analysts’ average estimate of $30.33 billion.
Never mind. Analysts took the results as confirmation that CVX stock will extend its run of solid returns. Citigroup’s Alastair Syme wrote in a note to clients:
“Our investment view is unchanged. While Chevron has already been one of the top performing Global Big Oil equity over the last 12M, we think the valuation remains undemanding. Appealing is the ability of the company to operate fairly agnostic of oil price, driven by near-term financial resilience and an opportunity-set (Permian, Kazakhstan) to make good capital choices.”
Chevron stock is now up 15% over the last 52 weeks. That clobbers the broader market’s gain of 2.5% over the same span. Shares in fellow Dow component Exxon Mobil Corporation (NYSE:XOM) are off by the same amount.
CVX Drills It
The key to the quarter was cost cuts.
CVX is committed to cutting about 8,000 jobs, which is about 12% of its workforce. It’s also spending billions of dollars less on capital expenditures. Indeed, the energy giant has slashed capital spending and administrative costs. That’s terrible news for employees and good news for Chevron stock holders.
As CEO John Watson said in a press release:
“We have made progress toward our goals of lowering the cash breakeven in our upstream business and getting cash balanced. Capital spending and operating and administrative expenses have been reduced by over $10 billion from the first nine months of 2015 as a result of a series of deliberate actions we have taken.”
An earnings beat even as big as CVX’s isn’t necessarily sufficient to ignite such outsize gains in Chevron stock in a single day. For that, the investors have to be confident in the outlook. After shedding so many expenses, operations look like it turned things around.
For example, the company’s upstream business — that’s the part that does exploration and production — reported a narrower loss in the most recent quarter. Citigroup says upstream is actually set for growth in the fourth quarter of 2017.
Stabilizing the upstream business helped CVX get a grip on its cash position. That’s music to equity income investors’ ears. To top it off, Chevron raised its quarterly dividend by a penny. That marks the 29th consecutive year of dividend hikes on an annual basis. At 4.23% after Friday’s run, Chevron stock already pays a generous dividend.
Anyone holding CVX stock for income can breathe easier now.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.