(Updates with comments from company's CEO, analysts' comments, fresh price and adds background)
By Isabel Ordonez
Of DOW JONES NEWSWIRES
HOUSTON -(Dow Jones)- Chevron Corp.'s (CVX) profits fell 51.5% as oil and natural gas prices slumped in the third quarter, but the results bested analysts' expectations thanks to a jump in output and a sharp cut in operating costs.
Quarterly production at the San Ramon, Calif., company rose 11% to 2.7 million barrels of oil equivalent per day, while its year-to-date operating costs fell about 13%. The production increase was driven primarily by new oil projects in the U.S. Gulf of Mexico and West Africa.
Chevron is the second largest U.S. oil company after Exxon Mobil Corp. (XOM). Both Exxon and ConocoPhillips (COP), the third-largest U.S. oil company, missed analyst expectations.
Chevron's results come as a high note for departing chief executive David O'Reilly, who will retire at the end of the year after 40 years with the company. He will be replaced in January by Vice Chairman John Watson.
"Our strategies are working well and the company's performing well," O'Reilly said in a conference call with analysts. "Even more importantly, the company is in very capable hands."
Although Chevron's quarterly results topped analysts' hopes, its profits still felt the pinch of lower oil and natural gas prices that also reduced this week's earnings of ExxonMobil and ConocoPhillips by 68% and 71%, respectively. Chevron also echoed the theme of weak refining earnings as margins remained tight during the quarter amid weak demand for diesel and gasoline.
After a multi-year boom in commodity prices and skyrocketing prices, energy companies have seen earnings tumble since oil and gas prices collapsed last year. While oil prices have rebounded from this year's low of $33 a barrel in February, natural gas prices have continued to recede, reaching a seven-year low on Sept. 4, before bouncing back recently above $5 a million British thermal units.
Chevron reported Friday a profit of $3.83 billion, or $1.92 a share, down from $7.89 billion, or $3.85 a share, a year earlier. The latest period included 20 cents a share in gains from asset sales and tax items. Revenue decreased 41% to a rounded $47.0 billion. Analysts forecast earnings of $1.47 a share on revenue of $47.84 billion.
Chevron is by far the major oil company with the strongest volume growth, said Mark Flannery, analysts at Credit Suisse in a note to clients.
Chevron already said earlier this month that production will grow and that earnings will be affected by lower commodity prices. But "nobody expected such impressive increase of production and such a significant cost reduction," said Fadel Gheit, analyst at Oppenheimer & Co. Inc.
The company's shares were trading 2.36%, or $1.84, down to $76.11, in a bad morning for petroleum equities. Chevron's stock is up roughly 5% this year. The sharp difference in year-over-year commodity prices difference sent Chevron's exploration and production down 41%. Refining and marketing profits dropped 89%, while its chemical business posted $167 million in profits.
Chevron confirmed Friday it will make its final investment decision to develop the massive Jack/St Malo oil discovery in the Gulf of Mexico in late 2010. O'Reilly also said the refining market will remain weak in the next two years and that the company will maintain its focus on growing its refining business in the Pacific Rim.
-By Isabel Ordonez; at Dow Jones Newswires; 713.547.9207; isabel.ordonez@dowjones.com