By William Patalon III
Money Morning/The Money Map Report
Chevron Corp. (CVX), the focus of Money Morning's popular "Buy, Sell or Hold?" feature back in late July, said it is predicting a jump in its third-quarter results, despite a decline in oil-and-gas output.
Without offering actual financial details, the second-biggest U.S. oil company said in its interim update that it "expects third-quarter earnings to exceed those of 2008's second quarter." The San Ramon, Calif.-based Chevron attributed the improved results to higher energy prices and better refining margins – both factors that were predicted by Money Morning Contributing Editor Horacio Marquez.
"I am happy to see Chevron executing – as we expected – and slowly improving its refining margins back to historical [norms]," Marquez said in an interview late last week. "The company's vertical integration gives it a natural hedge against the gyrations in crude prices and its global reach gives it a huge advantage in capturing profits during unusual crude market movements. This cash-rich company should be in great shape at a moment when cash is scarce. At these levels, the stock is a steal with a full recession already priced into it."
Chevron is slated to report its third-quarter results on Oct. 31. Analysts polled by FactSet expect the company to post earnings of $3.31 a share on revenue of $87.94 billion. That compares with third-quarter 2007 net income of $1.75 a share on revenue of $53.55 billion. Excluding one-time items, the year-ago profit was $1.94 a share.
Shares of Chevron, caught in the massive market downturn seen over the past month, fell 12.5% as part of Thursday's near-record market downdraft to close at $64. The stock has shed 31% of its value over the past 12 months, compared with a 41% drop by peers that make up the Amex Oil Index, Reuters reported.
The steep sell-off in such shares as Chevron and Exxon Mobil Corp. (XOM) "is basically traders throwing everything overboard to prevent the whole ship from sinking," Fadel Gheit, an oil-industry analyst at Oppenheimer Holdings Inc. (OPY) in New York, told Reuters.
Chevron's stock closed Friday at $57.83, down $6.17 each, or 9.64%.
Chevron based its assessment on better profit margins from its "downstream" refining-and-marketing operations, which were able to benefit from a gradual decline in crude prices through the three-month period, MarketWatch.com said. Like most of the world's big vertically integrated oil companies, Chevron buys much of the crude oil it needs for its refineries on the global market, since it doesn't itself produce enough to produce all the gasoline, fuels and lubricants that it refines, and then sells through its marketing operations, MarketWatch said.
Chevron predicted that its downstream businesses would rebound to post a profit for the third quarter – following a second-quarter loss – chiefly because the average price of a barrel of crude oil declined by $39 during the third quarter. The company also said that quicker maintenance and repair work at its refineries paid off.
Whether those improved refining margins can be sustained as the economy continues to weaken from the pounding it is taking from the escalating global financial crisis remains to be seen.
In the face of the overall upbeat news from the downstream part of its business, Chevron warned that third-quarter earnings from exploration and production – its "upstream" operations – would likely decline, thanks to falling commodity prices and the production stoppages that resulted from hurricanes Gustav and Ike sweeping through the Gulf of Mexico and through the Gulf-region oil-and-gas fields last month.
While the actual damages weren't reported, Chevron estimated that damages and write-offs from Gustav and Ike would excise about $400 million from its third-quarter results. It said that its total U.S. oil-and-gas output fell about 1% from the second to the third quarter. Indeed, domestic production in September will likely be down about 150,000 barrels per day because of Gustav and Ike.
Compared with its results from a year ago, analysts say that Chevron was on track to earn a lot more from its U.S. upstream operations, especially since the average crude oil price soared to nearly $120 a barrel in the July-August period – up from $68.70 for the full third quarter last year.
While U.S. output dropped 1%, overseas oil production fell an even-larger 6% during the first two months of the third quarter, the most recent data the company had available. Chevron blamed that decline on "downtime" related to several big expansion projects and on annual maintenance at its massive Tengiz Oil Field in Kazakhstan, MarketWatch said.
The volume of crude Chevron loaded onto tankers in the international market is expected to show a decline in the third quarter, according to the company.
Given the spreading global downturn, which analysts are blaming for the plummeting demand for energy, and falling fuel prices, this is a figure that experts will likely scrutinize.
News and Related Story Links:
Chevron says upstream curbed, refining stronger.
Chevron sees higher earnings despite lower output.
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Hurricane Ike is the Latest Wild Card in the "Guess the Gasoline Price Game."
- Money Morning Stock Analysis Feature
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.