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Chevron Profits Soar on Record Oil

Posted on: October 31, 2008 - Email Article - Printable Version

Chris Barrella

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Chevron Corp. [CVX: 76.66, +0.14 (+0.18%)] reported net income of $7.9 billion and diluted earnings of $3.85 per share, up from $3.7 billion and $1.75 per share from the same quarter last year. Rising oil and natural gas prices during the quarter helped to boost sales and other operating revenues 41% from a year ago to $76 billion. These numbers are on the heels of Exxon Mobile’s [XOM: 81.63, -0.01 (-0.01%)] record setting profits reported yesterday. Analysts had expected the second-largest U.S. oil company to report a net profit of

$6.55 billion, or $3.27 per share, on revenue of $89.4 billion.

Upstream Operations Shine

Chevron’s exploration and production services are extremely extensive across the globe with significant interests in emerging locations such as Kazakhstan and Thailand. Their worldwide operations fared well in the last quarter with net income of $6.2 billion, up 82% from a year ago on better margins and higher prices. This was in the face of Mother Nature doing her part to stand in the way of even greater gains. September hurricanes helped shut down production that caused a loss of 150,000 barrels of oil per day during the month. Hurricane-related expenses also cost upstream operations around $400 million from the bottom line. Worldwide oil-equivalent production averaged 2.44 million barrels, a 5.8% drop from the same period last year. Chevron was able to grow revenues as quickly as they did because of huge increases in the average sales prices of their refined products. The average sales price per barrel of crude oil and natural gas liquids was up $30 to $107 while natural gas spiked to $8.64 per thousand cubic feet, a 60% increase from 2007. They expect to have 90 percent of pre-hurricane production in the Gulf of Mexico to be back online by the end of 2009, with approximately 10,000 bpd lost indefinitely.

Downstream Solid

The refining, marketing, and transportation business segment was also impressive during the third quarter with net income of $1.8 billion, a huge turnaround from a net loss of $110 million a year earlier. Earnings were up primarily due to improved margins on the sale of refined products. These margins should look to be on the rise as oil continues to fall and cheaper gasoline entices drivers back to the roads.

Projects Update

2008

The Agbami Field in Nigeria began production in July averaging 100,000 bpd with full capacity of 250 MBOED by end of 2009
Kazakhstan operations hit full capacity in September at 540,000 bpd

2009

In Brazil, the deepwater Frade project is expected to start production in second quarter of 2009 with the potential of 85,000 barrels of crude and 30 million cubic feet of natural gas in 2011

Production down but Future looks bright

With higher prices benefiting oil and gas companies during the quarter, those with refining operations such as Chevron should see much higher refining margins due to the steep drop in crude oil prices recently. More positive effects should be realized with the 2008 hurricane season not a factor for the next two quarters and production ramping up on current projects in Nigeria and Kazakhstan.

With worldwide oil and gas production down 3.7% from the second quarter 2008 to 2.43 MBOED, management is looking for full-year BOE production of 2.55 million BOE per day, which is under their prior guidance of 2.65 million BOE per day. Even though Chevron is projecting some production losses, Chevron CEO David O’Reilly feels confident on his company’s position in this market, “Our strong balance sheet enables Chevron to continue investing in attractive projects that increase the production of oil and gas and improve the efficiency of our refinery network.”

Higher margins should result in more profits for Chevron going forward, but as crude and natural gas prices fall from records, don’t expect to see any more record setting numbers anytime soon.

- Chris Barrella

Disclosure: The fund the author is associated with is long XOM.

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