U.S. energy giant Chevron Corp. (CVX) reported a rise in its first-quarter 2012 profits, benefiting from higher oil prices.
Earnings per share (excluding adjustments for foreign-currency effects) came in at $3.39, handsomely above the Zacks Consensus Estimate of $3.30 and the year-ago adjusted profit of $3.17.
Quarterly revenue increased marginally (by 0.6%) year-over-year – from $60,341.0 million to $60,705.0 million – but was 17.5% below our projection, pulled down by plunging U.S. natural gas realizations.
Upstream: Chevron’s total production of crude oil and natural gas decreased 4.7% from the year-earlier level to 2,631 thousand oil-equivalent barrels per day (MBOE/d). Volume gains in Thailand and U.S. were more than offset by normal field declines, downtime associated with maintenance activities, and asset sale.
The U.S. output dipped 6.2% year over year, while Chevron’s international operations (accounting for 75% of the total) experienced a 4.2% decline in volumes. Losses on the production front were more than made up by higher realized liquids prices, resulting in a 3.3% year over year rise in upstream earnings to $6,171.0 million.
Despite the slight dip in Chevron’s quarterly volumes, we believe its production outlook remains one of the most robust in its peer group, with a number of major initiatives scheduled to come online during the next few years. Major start-ups during the last few months include the deepwater Usan project in Nigeria and the Caesar/Tonga project in the deepwater Gulf of Mexico.
Downstream: Chevron’s downstream segment's earnings increased to $804.0 million during the quarter, from $622.0 million in the previous-year period. The improvement can be attributed to gains from the sale of its Spanish fuel marketing assets, partially offset by lower overseas refined product margins.
Capital Expenditure, Balance Sheet & Share Repurchases
The second-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) spent $6,417.0 million in capital expenditures during the quarter. Approximately 92% of the total outlays pertained to upstream projects.
As of March 31, 2012, the company had $18,871.0 million in cash and total debt of $9,275.0 million, with a debt-to-total capitalization ratio of about 6.9%. As part of the stock repurchase program announced in 2010, Chevron repurchased $1,250.0 million worth of shares in the March quarter.
Recently, the San Ramon, California-based company announced an 11.1% increase in its quarterly dividend to 90 cents per share, or $3.60 per share annualized. The dividend is payable on June 11 to shareholders of record on May 18, 2012.
Rating & Recommendation
Chevron is one of the largest integrated energy companies in the world and has an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.
However, due to its integrated nature, Chevron is particularly susceptible to downside risk from any weakness in the global economy. We are also concerned by the company’s high level of capital spending, which may result in reduced returns going forward.
As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).
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