The Rising Influence of Rising Affluence

[DewDiligence]

CVX 2Q10 Profit Soars on Downstream/Upstream Gains

[On July 13, CVX preannounced a strong quarter based on greatly improved refining margins relative to 1Q10 (#msg-52209206); consequently, the actual quarterly numbers released Friday morning did not do anything for the share price. Nevertheless, CVX put up impressive quarterly numbers on the upstream side that were barely affected by the GoM issues. Production guidance was raised slightly because the recent annualized decline in the “base” business has been 4-5% rather than the 6% that was expected.

Based on consensus EPS forecasts for 2011, CVX has a P/E of about 8x, which strikes me as astonishingly cheap, and the dividend yield is a generous 3.8%. If there’s a bear case for this stock, I don’t know what it is. (I don’t consider the lawsuit in Ecuador a serious concern.)]

http://online.wsj.com/article/SB10001424052748703999304575399550275882906.html

›JULY 31, 2010
By ISABEL ORDONEZ

HOUSTON—Chevron Corp.'s second-quarter profit more than tripled, driven by higher oil prices and a surge in refining earnings.

Chevron, of San Ramon, Calif., and the No. 2 U.S. oil-and-gas company by market value after Exxon Mobil Corp., joined other energy companies in posting a jump in quarterly profits this week, helped by a rebound of the refining business. Refining margins, which slumped during the recession, have recovered in recent months as demand for fuel grew with the onset of the summer driving season and as the economy strengthened.

Chevron posted much stronger results from its exploration and production, or upstream, activities than its peers, with income from oil and gas sales nearly tripling. Exxon and ConocoPhillips posted increases of 40% and 87%, respectively. Chevron's output is more heavily weighted than its rivals' toward crude oil [see table in #msg-52172028], which has been more profitable than natural gas, the price of which has languished amid a boom in domestic U.S. production.

Chevron is "differentiating itself with stellar upstream results," said William Featherson, an analyst at UBS.

The company posted earnings of $5.41 billion, or $2.70 a share, up from $1.75 billion, or 87 cents a share, a year earlier. Revenue jumped 29% to $51.05 billion. Chevron's profit beat analysts' expectations of $2.44 a share, mainly due to higher-than-expected refining profits.

Earnings from the downstream segment came in at $975 million, a more-than-seven-fold increase from a year earlier. Profit from oil and natural-gas production nearly tripled to $4.5 billion, boosted by a 3% rise in daily production to 2.75 million barrels of oil equivalent.

Chevron also raised its 2010 production target to 2.78 million barrels of oil equivalent, representing 3% growth, up from its original outlook of 1% growth.

A large part of Chevron's oil production comes from the Gulf of Mexico, where the U.S. government imposed in May a six-month drilling moratorium in the wake of the BP oil spill. The ban hasn't yet dramatically affected the company's results, but Chevron said it expects 10,000 barrels a day of production to be lost this year because of delays in the issuance of permits and the slowdown of activities needed to increase production.

The impact could grow if the government extends the moratorium, said George Kirkland, Chevron's executive vice president for global upstream and gas, on a conference call. A longer drilling ban could delay deep-water projects in the Gulf that are expected to drive the company's production growth.

"We think we're in pretty good shape up until November," Mr. Kirkland said. But, "at some point, [the moratorium] is going to start pushing the start-up date of these projects."

An extension of the ban could reduce supply and raise prices, Mr. Kirkland said, adding that if the government raises a cap on the liability individual companies have for an accident, it will hurt small producers rather than giants such as Chevron.

"We believe competition is good, and if you set the liability cap too high there's a lot of companies that will not be able to participate," he said.

U.S. lawmakers have been discussing the possibility of increasing the $75 million liability cap after Transocean Ltd.'s Deepwater Horizon rig burned and sank in April, unleashing the biggest offshore oil spill in U.S. history. Mr. Kirkland said the company believes the investigation of the spill will show that the "tragedy was preventable" [the industry-standard euphemism meaning that BP screwed up].

Chevron's results benefited from a rise in oil prices during the quarter, with the average sale price per barrel of crude oil and other liquids in the U.S. coming in at about $71, up from $50 a barrel a year earlier.‹