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Should Investors Be Worried About Chevron’s Profit Warning?

April 10, 2014 | About:

Yesterday, America’s second biggest oil and gas company Chevron (CVX) issued a profit warning for the first quarter of the current fiscal year. Does this mean that the investors should start panicking?

Chevron’s shares have risen by just 1.3% in the last 12 months, trailing behind its rival and America’s biggest energy company Exxon Mobil (XOM) which his up more than 9% in the corresponding period.

As compared to Exxon Mobil, Chevron is cheaper (in terms of price-to-earnings ratio) and offers a higher yield of 3.36%.

The company will report its quarterly results on May 2, nearly three weeks from now. The business is expecting a dip in profits from the previous quarter on the back of higher currency conversion costs and an increase in impairment charges. This, however, is a short term hiccup as the company could grow its production to 3.1 million barrels per day from less than 2.6 million barrels per day currently.

This expected uptake in production could translate into better performance of its stock.

Profit Warning

Chevron is expecting a sequential drop in profits for the current fiscal year on the back of foreign currency fluctuations and impairment charges.

In the first two months of the current fiscal year, Chevron’s production has come under pressure from severe weather conditions in some regions, such as Kazakhstan, Canada, and the U.S.

However, an increase in demand from Thailand and an uptake in production from Angola’s LNG facility could offset some of the decline coming from adverse weather.

In the first quarter, Chevron will record foreign exchange related losses of around $100 million, as opposed to a gain of $200 million in the fourth quarter of 2013. The impairment charges, mainly related to its upstream assets, will be between $400 million and $500 million.

The company’s production chart for the first two months of the current fiscal year is given below. While the table gives a rough measure of the company’s performance, it is not an accurate measure as the daily production in the first two months of 2014 has been compared with entire quarters.

Notice that the company’s production from the U.S. has consistently fallen from the first quarter of 2013 to the last quarter. In the first two months of the current year, production came in at 637,000 barrels of oil equivalents per day, lower than the daily production in any of the previous quarters throughout 2013.

On the other hand, in the international markets, the daily production in the first two months of 2014 has improved slightly (by 0.8%) from the previous quarter to 1.94 million barrels of oil equivalents.

In the first two months, the average realized prices for liquids are also down as compared to the price levels in 2013. On the other hand, the natural gas prices have significantly improved.

Higher Production

Despite the expected decline in profits, the situation is not alarming. In the first two months of the current fiscal year, the company has still produced oil and gas at an average of 2.58 million barrels of oil equivalents per day. This is in line with the company’s plans to produce 2.6 million barrels of oil equivalents per day in the current fiscal year.

Chevron is currently developing the lucrative Argentina’s Vaca Muerta shale formation, by partnering with the state-owned giant YPF SA (YPF). Production from the region could grow by 65,000 barrels of oil equivlants per day by 2017. By then, Chevron believes that it will be producing at an average of 3.1 million barrels of oil equivalents per day.

Five Major Projects

Moreover, investors should wait for five major projects that could come online within the next two years that could give a significant boost to Chevron’s production.

The company has two massive projects in Australia: the $50 billion Gorgon project and the $25 billion Wheatstone project with a total capacity of 24.5 million tonnes per annum.

Chevron, and its partners, has three major deep water projects in its pipeline at the Gulf of Mexico: The $7.5 billion Jack/St. Malo and the $4 billion Big Foot project have a combined production capacity of 173,000 barrels of oil equivalents per. Chevron holds the majority stake in these projects.

Moreover, the $2.3 billion Tubular Bells project at the Gulf of Mexico, operated by Hess Corp (HES) in which Chevron holds 43% interest, could also come online in the current year. This project comes with a production capacity of 40,000 barrels per day.

Disclosure: I have no positions in any of the stocks mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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stitifier
Stitifier - 4 months ago

Buying on weakness.

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