There’s no denying Chevron (NYSE:CVX) is on the mend. But, the swift (albeit contained) retreat of CVX stock following Friday morning’s release of the company’s second-quarter numbers says the market doesn’t think Chevron is moving fast enough.
Investors may have a point. Or, they may have readily seen the glass as half-empty simply because a rival oil and guess outfit had posted disappointing Q2 numbers earlier that day. Or, it’s entirely possible the analyst community was simply expecting too much, too soon.
The conference call and its transcript will certainly shed more light on the matter. As it stands just from the earnings press release, though, traders were right to mostly steer clear of CVX stock since mid-May despite firm crude prices.
Chevron Earnings Recap
For the quarter ending in June, Chevron earned $1.78 per share on revenue of $42.2 billion. Both numbers compared favorably to the profit of 91 cents per share of CVX stock and sales of $34.5 billion reported for the second quarter of last year. But, neither figure lived up to expectations. Analysts were calling for a profit of $2.09 per share and a top line of $45.6 billion
CVX stock fell in response to the news, trading around 2% lower immediately after the earnings figures were released, though at this point it is up about 1%. The fact that rival Exxon Mobil (NYSE:XOM) also reported disappointing second-quarter numbers on Friday morning was of little solace to Chevron shareholders. Indeed, it may have served to augment the market’s concern regarding Chevron.
Better cash flow that will kick-start a sizeable stock buyback program didn’t help as much as one might have hoped either.
CEO Michael Wirth explained “Our cash flow continues to improve with higher upstream margins and volumes, combined with disciplined spending. This enables us to initiate share repurchases, which are expected to be $3 billion per year based on our current outlook.”
Operational cash flow for the first six months of the year was $11.9 billion, up from the $8.7 billion generated for the first half of last year. Net income in the second quarter improved 134%, from $1.45 billion to $3.4 billion.
Drilling Down
Though Chevron has always has a solid upstream presence, it’s been a side of the business the company’s further prioritized since early last year.
“Upstream” is, broadly speaking, the drilling and exploration side of the oil business, as opposed to “downstream,” which generally means refining and selling oil … sometimes even directly to consumers. Chevron owns gasoline stations too.
It’s usually upstream operations that can make or break an oil company’s quarter, as its profitability is the most sensitive to changes in crude prices.
That was certainly the case for Chevron during the second quarter.
With crude prices ending the second quarter at $73 per barrel versus a Q2-2017 price of $45 — an improvement of 62% — it hasn’t been this easy for upstream businesses to turn solid profits in years. The organization capitalized on the opportunity. Chevron’s upstream arm earned $3.3 billion last quarter, versus income of only $853 million a year earlier. Conversely, downstream profits actually fell from $1.2 billion to $838 million.
Global production of 2.83 million barrels per day wasn’t remarkably better than the year-ago figure of 2.78 billion. But, drilling is now more profitable, as the company is not only enjoying stronger oil prices, but optimized operations.
Looking Ahead for CVX Stock
A year ago Chevron was aiming to sell some assets (as much as $5 billion worth) before the end of 2017, and further cultivate new and existing prospects; the Permian Basin was and still is a major breadwinner for the company.
For the most part, that’s happened. Wirth noted in the earnings release “We continue to make good progress with our portfolio optimization efforts. In the second quarter, the company completed the sales of its upstream interests in the Elk Hills Field in California and the Democratic Republic of the Congo. Additionally, in July we announced our intent to market our U.K. Central North Sea assets.”
Whatever Chevron’s got in mind for the next quarters, the pros like it … or at least did, prior to Friday morning’s news.
The analyst community was modeling earnings of $8.20 per share of CVX stock for the full year, more than doubling last year’s $3.70. Revenue is expected to grow almost 23% to $173.7 billion. Even factoring in the second quarter’s shortfall, 2018 is on pace to be a progressive year.
Growth is expected to slow after that, perhaps reflecting a cooling of oil’s rally. If crude stabilizes though, it will still be stabilizing at healthy prices that allow for solid profits.
It will also more than support Chevron’s projected dividend of $4.48 per share.
That’s important, because as Dana Blankenhorn put it a year ago, CVX stock more than anything else is a dividend play. On Friday though, that still-supported dividend was irrelevant even if it’s not quite been threatened. In this environment, any shortcoming — even falling short of unreasonably lofty expectations — leads to trouble. Now it becomes a question of how long traders will choose to punish Chevron for the quarter’s results.
BP (NYSE:BP) is expected to post its Q2 numbers on Tuesday, July 31st, rounding out the results of the oil industry’s major names.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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