To its credit, Chevron Corporation (NYSE:CVX) has already turned the corner, so to speak. Per-share earnings are growing on a sequential basis, with the oil giant only logging one quarterly loss for the first quarter of 2016 following the 2014/2015 implosion of crude oil … a feat most of it peers can’t boast. The past two reported quarters were each positive for Chevron stock, and each profit figure was higher than the last.
The profit rebound was in step with crude’s recovery; oil prices are up 89% since this point in January of 2016, and they’re still going strong. Chevron stock has advanced 35% for the same timeframe.
Is that enough to deem CVX stock a buy now? Maybe, or maybe not. We’ll know a great deal more about the company’s true health on Friday morning, following its fiscal fourth-quarter report.
The New Normal Is Palatable
Giving credit where it’s due, it was CLSA’s Asit Sen and Chris Walling who summed up what it will take to succeed in the oil and gas industry from 2017 and beyond. Earlier this month the duo observed the following for all oil stocks:
“After a lean period of lower oil prices and relentless cost cutting, we are finally seeing early signs of a global upstream investment revival. As the industry recalibrates its assessment of risk and reward, we highlight four early trends: 1) some signs of increase in asset M&A appetite by global majors (>$5bn in announced transactions since early December), 2) renewed emphasis on US shale growth (short-cycle bias reinforced by Chevron’s recent capex announcement) … We expect a subdued oil price environment ($45-65/b Brent) as competition between low-cost Middle East producers and US shale for market share continues, making this a challenging period for industry players to get additional clarity on spending.”
Of the operative words in the commentary, one of the big ones for Chevron and of interest to Chevron stock holders is “recalibrates.” The other key detail in the assessment? We can expect brent prices to linger between $45 and $65 per barrel for the indefinite future.
That’s just fine by Chevron.
Though it didn’t undergo the most dramatic overhaul (read “cost cutting”) in the industry, it mustered its fair share of them. A year ago, in the shadow of its first and only quarterly loss in years, the company promised to cull $9 billion in expenses in 2016, after cutting out the same figure in 2015.
The end result is a lean, mean, oil-drilling machine; it can turn a profit on oil prices that weren’t profitable just a couple of years ago.
Crunching the Numbers
Fortunately, not only is the company able to do more with less, crude prices have continued to advance — though not in a straight line — over the course of the fourth quarter and into the first. Q4’s numbers should be better than Q3’s all around.
On the upstream side of the business that Sen and Walling specifically pointed out, Chevron should see another quarter of forward progress after logging three consecutive quarterly losses. Brent prices averaged $45 per barrel during the third quarter, and averaged a stronger $51 per barrel during the fourth quarter of 2016.
The company’s downstream income managed to remain positive even when oil was in the gutter, although that bottom line did shrink. Nevertheless, downstream income began to grow again in the second fiscal quarter of last year, and is also expected to expand again for the fourth-quarter report.
Bottom Line on Chevron Stock
Translating those forces into specific numbers, analysts collectively expect Chevron to report a profit of 64 cents per share on revenue of $33.76 billion. The company posted a top line of $29.25 billion for the last quarter of 2015, when it earned 26 cents per CVX share.
That would be the best quarter the company’s reported since the third quarter of 2015, cementing Chevron’s place in the upper echelon of oil giants … a spot it’s secured with some help from one of the industry’s most compelling project pipelines. The Gorgon and Wheatstone LNG projects in Australia and its deepwater projects in the Gulf of Mexico are enviable.
If history repeats itself, Chevron is likely to beat earnings estimates in Friday’s report. That’s not going to make or break CVX, though (at least not for long). At this point, Chevron is ultimately a play on oil prices. It’s a very good one for oil bulls though … possibly even the best. Friday’s news should firm up that premise.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.