Chevron's Earnings Rise On Higher Prices, Gains On Asset Sales Amid Improving Production Outlook
Chevron's ( CVX ) second quarter earnings rose higher on better price realizations and gains on asset disposition. Higher global benchmark crude oil prices and the spike in natural gas demand in the U.S. this winter drove the company's average price realization per barrel of oil equivalent more than 6% higher over the previous year's quarter. In addition, Chevron also gained from the recent sale of its non-operating interest in 7 crude oil producing fields in Chad's Doba basin along with around 21% interest in two affiliates that own an export pipeline, which transports crude oil to the coast of Cameroon. The company's reported diluted earnings per share ( EPS ) grew almost 7.6% year-on-year to $2.98.
Chevron's total hydrocarbon production was down by more than 1.4% y-o-y as growth from the continuing development of shale and tight resources and the ramp-up of recently started projects was more than offset by the impact of downtime due to turnaround activities, lower production entitlements, and normal field declines. However, the company reaffirmed its short to medium term production growth outlook citing progress on the key projects that are expected to drive its average daily hydrocarbon production rate to 3.1 million barrels of oil equivalent per day (MMBOED) by 2017 from around 2.6 MMBOED currently.
Chevron is the second largest energy company in the U.S. after Exxon Mobil. The company manages its investments in subsidiaries and affiliates, for which it provides administrative, financial, management and technological support. This extends both to its U.S. subsidiaries and to its international subsidiaries, engaged in fully integrated petroleum, chemicals and mining operations, as well as power generation and energy services. It generates annual sales revenue of around $230 billion with a consolidated adjusted EBITDA margin of ~21.8%. Based on the recent earnings announcement, we have revised our price estimate for Chevron to $128/share , which is almost 11.5x our 2014 full-year GAAP diluted EPS estimate for the company.
Upstream Production Outlook Improving
The valuation of an integrated oil and gas company's upstream division largely depends upon new discoveries of technically and economically recoverable hydrocarbon reserves and ongoing projects that would boost the rate of hydrocarbon production. Although, Chevron's total oil equivalent hydrocarbon production rate has remained relatively flat around 2.6 million barrels per day since 2006, the short to medium term prospects of the company's upstream division look bright. This is because it is making some good progress on the key growth projects outlined below.
1. Gorgon LNG: The Gorgon LNG project forms the centerpiece of Chevron's aggressive production ramp-up plan, as it is expected to contribute over 0.2 MMBOED to Chevron's net production volume at its peak capacity. The project will source natural gas from the Gorgon and Jansz-lo fields in the Greater Gorgon area, which holds around 40 trillion cubic feet of recoverable resource. During the second quarter earnings call, Chevron announced that the project is 83% complete and is on-track for first LNG production by mid-next year. It is expected to reach the peak production capacity by 2017 after all the three LNG trains come online. (See more on Gorgon LNG: A Closer Look At Chevron's Biggest Bet In The Global LNG Market )
2. Wheatstone, Angola LNG: Chevron is also working on the $29 billion Wheatstone LNG Project, located 12 kilometers west of Onslow on the Pilbara coast of Western Australia. The two-train LNG plant will produce 8.9 million tones per annum (MTPA) of LNG at its peak capacity. Chevron noted during the recent earnings call that the Wheatstone project is now 40% complete and is on-track for a late-2016 start-up. The company also noted that the $10 billion Angola LNG project, which has been offline since April this year due to a pipeline rupture should restart in the second half of next year. (See more on Angola LNG: A Closer Look At Chevron's Angola LNG Project)
3. Gulf of Mexico Deepwater Projects: Chevron is also betting on three deepwater projects, which include Jack/St Malo, Tubular Bells, and the Big Foot, in the Gulf of Mexico to boost its total oil and gas output by 0.1 MMBOE in the short to medium term. The Jack/St Malo deepwater project comprises the joint development of the Jack and St Malo oilfields that are located around 40km away from each other in the Gulf of Mexico. Chevron owns a 50% interest in the Jack field and is also the operator of the St Malo field with a 51% interest. The project is currently on-track for first production by the end of this year. Chevron also holds a 42.86% stake in the Tubular bells project that is expected to come online during the third quarter itself. (See more on Chevron's Deepwater prospects: A Look at Chevron's Key Deepwater Projects)
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