When Chevron’s (NYSE: CVX) third-quarter results came out, it was looking less likely that it would meet its previously stated goal of covering all of its spending obligations with operating cash flow rather than having to rely on debt or asset sales to bridge the gap. Thanks to a little boost in oil prices, though, the company was able to meet this management target in the fourth quarter by the slimmest of margins.
Let’s take a look at what Chevron’s results looked like for the past quarter and what investors can expect for the rest of the year.
Here’s the seemingly obligatory statement that comes with every company’s earnings announcement this past quarter: These results are skewed a lot by the changes to the U.S. tax code and don’t necessarily reflect what happened this most recent quarter. One thing that is different for Chevron is the way in which it reported those changes. According to management, its U.S. upstream and U.S. downstream businesses realized benefits of $3.33 billion and $1.16 billion, respectively, but at the same time, it took a $2.47 billion charge at the corporate level.
From an operations standpoint, the two things that stood out were the improved performance of its international upstream segment and the overall decline at both of its downstream segments. International upstream benefited from the one-two punch of higher oil prices — average realized price increased from $44 per barrel last year to $57 per barrel — and additional production from its three LNG facilities: Gorgon, Wheatstone, and Angola. On the downstream side, Chevron’s results suffered from lower refining margins, which has been a common thread among integrated oil majors this quarter.
Data source: Chevron earnings release. Chart by author.
The highlights
- Total production for the quarter came in at 2.74 million barrels of oil equivalent per day. That was an uptick both sequentially and year over year that was mostly related to higher volumes from Gorgon, Wheatstone, and Angola LNG offsetting declines from asset sales and lower amounts from production entitlement contracts. For the entire year, production grew by just over 5% compared to 2016.
- For the year, the company announced that its reserve replacement ratio was 155%. That means the company added more reserves than it produced in 2017 by a considerable margin.
- Chevron’s Permian Basin production rates continue to be one of the best-performing assets it has. This past quarter, the company reported that production from the Midland and Delaware
- Basins was 205,000 barrels of oil equivalent per day. That puts Permian production growth almost a year ahead of its schedule for that particular asset.
- Management is also looking to build its Permian Basin operations with more acquisitions.
- Chevron closed on deals for 60,000 acres in 2017 and anticipates about 90,000 acres of new assets in 2018.
- After the end of the quarter, the company announced its 2018 capital spending plan. Chevron expects to spend $18.3 billion in 2018; this is a slight decline compared to the $18.8 billion in 2017 and the fourth consecutive year of spending declines. This strategy of lower capital spending is a different approach than its peers, which have all announced increased spending for this year.
What management had to say
In his first quarter as the head of the company, CEO Michael Wirth continued the theme that his predecessor set by highlighting how the company was able to achieve its stated goal of meeting its spending and dividend obligations with cash from operations as well as some operational highlights for the year:
Earnings and cash flow grew significantly in 2017. We achieved our objective of being cash flow positive through deliberate actions to reduce capital expenditures, lower our cost structure, start and ramp-up projects, and conclude planned asset sales. Higher commodity prices helped as well. These improvements give us the confidence to increase the dividend by $0.04 per share, which puts us on track to make 2018 the 31st consecutive year with an increase in annual dividend payout.
We replaced more than 150 percent of the reserves we produced, and reached several significant upstream project milestones in 2017. These included our first LNG shipments from Train 3 at Gorgon and Train 1 at Wheatstone in Australia. We also posted impressive production growth in the Permian Basin in the U.S.
What a Fool believes
It’s a little peculiar that Chevron’s management has elected to keep its capital spending plans low for 2018 when most of its peers have shifted toward growth. It’s even more peculiar because Chevron’s bottom line has increasingly become dependent on production as it slowly sheds some of its refining assets. The continued ramp-up at its LNG facilities and performance of its Permian Basin assets will likely provide better results in 2018, but the company will need to start greenlighting some new projects soon. Perhaps with a new CEO in place, we will begin to see a change in direction at Chevron this year.
