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Is Chevron's (CVX) Upstream Unit Poised for a Robust Q4 Show?

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It's earnings season again and oil supermajor Chevron CVX is gearing up to release its fourth-quarter results on Jan 28. This time around, the primary contributor to the company’s earnings — its upstream (or exploration and production) division — is likely to have benefited from the ongoing momentum in oil and natural gas prices. Chevron also has a downstream business, which refines crude oil into fuels like gasoline and diesel oil.   

Click here for a complete rundown of the company’s expected Q4 performance.

Chevron has extensive upstream operations in all major hydrocarbon-producing regions of the world. The Zacks Rank #3 (Hold) company is primarily involved in the acquisition, development and exploitation of crude oil and natural gas properties.

A Look at Chevron’s Upstream Performance in Q3

Chevron’s production of crude oil and natural gas increased 7.1% from the year-earlier level to 3,034 thousand oil-equivalent barrels per day/MBOE/d (58% liquids) and it was the fourth successive quarter where volumes topped 3 million barrels per day. The year-over-year rise reflects the contribution from the Noble Energy acquisition and lower production curtailments.

The U.S. output was up 14.8% year over year to 1,127 MBOE/d and the company’s international operations (accounting for 63% of the total) increased 3% to 1,907 MBOE/d.

Apart from higher production, Chevron also experienced a significant improvement in commodity prices. At $58 per barrel, Chevron’s average realized liquids prices in the United States were 87.1% above the year-earlier levels while prices overseas rose 74.4%. On the natural gas front, its realizations soared 265.2% and 61.4%.

The dual catalyst of increase in volumes and realizations meant that Chevron’s upstream segment recorded a profit of $5.1 billion in the third quarter of 2021, rocketing from $235 million earned in the year-ago period when the energy sector was just coming out of the devastated by the pandemic-induced demand destruction and price plunge.

Commodity Price Gains to Aid Upstream Income Generation in Q4

Benchmark oil prices rose sharply in 2021, thanks to surging demand from the economic reopening and an improving supply-demand narrative. With fundamentals pointing to a tighter market, the Zacks Consensus Estimate for the average sales price for crude in fourth-quarter 2021 is pegged at $77 per barrel, up significantly from a year earlier when the company fetched $33 in the United States and $40 overseas.

Although the company maintains an oil-heavy production mix, natural gas still contributes around 40% to the total volume. This healthy exposure to natural gas could also work in Chevron’s favor as the price of natural gas has soared compared to the year-ago levels. As a matter of fact, the consensus mark for the fourth-quarter average sales price for natural gas in the United States stands at $4.37 per thousand cubic feet compared to just $1.49 in the corresponding period of 2020.

Chevron, like its peer ExxonMobil XOM, is set to benefit from the spike in crude and natural gas prices. For the to-be-reported quarter, the Zacks Consensus Estimate for the upstream segment is pegged at a profit of $5.3 billion, indicating a massive jump from the prior-year quarter’s income of $501 million.

For Zacks Rank #1 (Strong Buy) ExxonMobil’s upstream segment, the massive improvement in commodity prices could have increased fourth-quarter 2021 earnings by up to $1.9 billion from the previous quarter’s levels. Per a recent filing, ExxonMobil expects that changes in the natural gas price will increase fourth-quarter earnings by $700 million to $1.1 billion. Moreover, changes in liquid prices will increase earnings by $400 million to $800 million. XOM’s upstream asset divestments, which involve the U.K. North Sea assets, could raise up to $500 million.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Overall Earnings & Revenue Projections

Coming back to CVX, the Zacks Consensus Estimate for fourth-quarter earnings is pegged at $3.11 per share, suggesting a turnaround from the prior-year quarter’s reported figure of a penny loss. For quarterly sales, the consensus mark of $45 billion suggests a rise of 78.3% from the year-earlier quarter’s reported number.

Strong Earnings Season for Energy

Supportive industry fundamentals and the emerging multi-year commodity price upcycle have led to a good earnings season for energy companies so far.

Schlumberger SLB, the leading player in the oilfield service space, reported fourth-quarter 2021 earnings of 41 cents per share (excluding charges and credits) that beat the Zacks Consensus Estimate of 39 cents. SLB’s quarterly earnings were aided by higher contributions from Europe/CIS/Africa, strong North America rig activity and increased well construction activities in the U.S. Gulf of Mexico.

Fuel demand has improved drastically, so has oil price, owing to the roll-out of coronavirus vaccines at a massive scale. Schlumberger expects the trend to continue for the next few years, which will drive upstream investment, especially in international resources. SLB expects to capitalize on this positive trend.

Smaller rival Halliburton HAL also reported strong fourth-quarter earnings on the back of better-than-expected profit from its Drilling and Evaluation division. HAL reported adjusted net income per share of 36 cents, beating the Zacks Consensus Estimate of 34 cents.

In more good news for investors, Halliburton raised its quarterly dividend by 167% to 12 cents per share (or 48 cents per share annualized). Further, as part of its ongoing commitment to debt reduction, HAL announced that it will partly redeem its $1 billion of senior notes due in 2025.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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Chevron Corporation (CVX) : Free Stock Analysis Report
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