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CVX Reports (Uneventful) 2Q11 Results

http://online.wsj.com/article/SB10001424053111904800304576475942089091376.html

›JULY 29, 2011, 5:02 P.M. ET
By Isabel Ordonez

HOUSTON—Chevron Corp. posted a 43% jump in earnings, cashing in on markedly higher oil prices and more profitable fuel sales.

The second-largest U.S. oil company by market value made $7.73 billion in the second quarter, or $3.85 a share, widely beating analyst expectations on better-than-anticipated results in its refining arm. Chevron's results, like the eye-popping profits earned by fellow U.S. oil companies Exxon Mobil Corp. and ConocoPhillips, are a sign of how quickly the energy industry has recovered from the recession due to strong global demand for oil.

Most of Chevron's earnings came from the company's exploration-and-production segment, which benefited from high oil prices due to turmoil in the Arab world. Its average second-quarter sale price of oil was $104 per barrel in the U.S. and $107 in the rest of the world, up 47% and 51%, respectively, from a year earlier.

But high oil prices hit Chevron's production, which dropped 2.2% to 2.69 million barrels of oil equivalent per day, in the second quarter. This was due to the effect of production-sharing contracts with foreign governments, which generally give oil companies less production from projects if oil prices go up.

The decline shows that although oil giants are benefiting from higher oil prices, they continue to struggle to raise output at a time when their fields are depleting rapidly and access to new, vast reserves has become more difficult, said Phil Weiss, an analyst with Argus Research.

Chevron also cut its production guidance for this year by 1% to 2.76 million barrels of oil equivalent per day. Company executives said on a conference call with analysts that the revision primarily was driven by a recent incident in Thailand that caused a gas pipeline that was not operated by Chevron to be shut down, and by a slower-than-expected increase of production at Royal Dutch Shell PLC's plc Perdido project in the deepwater Gulf of Mexico. Chevron has a 37.5% interest in the project.

Chevron reaffirmed, however, that it expects to have average annual production growth of about 1% from 2010 until 2014 and 4% to 5% from 2014 to 2017.

UBS analyst William Featherston said it is unlikely Chevron's production-guidance revision would impact the company's share price because the valuations of major oil companies are driven mainly by the profits they obtain on the money they invest rather than by how much they increase production.

Chevron Chief Financial Officer Patricia Yarrington said the company is on track to have a capital expenditure budget of $26 billion this year. She added that the company continues to buy back its own shares, but at a moderate pace, partly due to concerns about the U.S. and global economic environment.

The policy environment in Washington coupled with concerns about slow GDP growth in the U.S. and China have the company on the fence, Ms. Yarrington said. "I think you would agree with us there's a fair amount of uncertainty out there," she told analysts.

Continued economic uncertainty could result in a short-term fall in oil prices, although the company is confident in increased demand for oil in the long-term.

Chevron said it has "high confidence" it will increase its Australian Gorgon project's capacity by adding a fourth production unit to chill natural gas to a liquid for shipment, known as a train. Chevron owns nearly 50% of Gorgon, which also counts Exxon Mobil and Shell as major investors. The company signed off on Gorgon's initial phase in September 2009 and plans to ship its first LNG cargo from the project, located offshore Western Australia in 2014.

Chevron confirmed that it is advancing in the development of various projects in the deepwater Gulf of Mexico that are expected to boost its future growth. Executives said the company is planning to bring two extra rigs into the area later this year in order to accelerate drilling.

Chevron Executive Vice President George Kirkland said Chevron may make some small acquisitions in the Marcellus Shale in Pennsylvania that could fit well with the acreage the company recently bought in the area. But he said it was unlikely the company will embark on a major asset acquisition.‹