Chevron Corp. (CVX, Financial) reported net income of $3.5 billion, translating to $1.85 per share, for the fourth quarter of fiscal 2014, down over 28% from $4.9 billion or $2.57 a share in the prior-year quarter. The company also reported a massive revenue loss from $56.158 billion in the year-ago quarter to $46.988 billion in Q4 2014, due to decline in crude oil prices as well as flat upstream production. However, the results beat consensus estimates that had pegged the figures at $35.872 billion in revenue and $1.64 a share in earnings. At the same time, Chevron’s international downstream earnings for the fourth quarter grew more than 400% year-on-year, with sales of lubricants, chemicals and other refined products helping to offset the nearly 60% plunge in crude prices in June 2014 that has eroded margins across the oil industry. Although Chevron shares have lost 12% in the last quarter, the S&P 500 has gained 1.3%.
Downstream Operations Boost Earnings
Chevron reported earnings from its upstream operations in the US such as production and exploration of $432 million for Q4 2014, down from $803 million in the prior-year quarter, with higher depreciation expenditure and reduced crude realizations affecting the bottom line. While the company’s average sales price for natural gas remained unchanged at $3.34 per thousand cubic feet from a year ago, the average sales price for oil and natural gas liquids fell from $90 a barrel a year ago to $66 per barrel in the fourth quarter of 2014 in Chevron’s US division. Concurrently, Chevron’s reported earnings of $2.24 billion from international upstream operations, down from $4.049 billion from the Q4 2013 despite positive foreign currency headwinds that contributed to a $453 million increase in earnings in the 2014 quarter, compared to $300 million a year earlier.
However, downstream earnings from chemical, marketing and refining operations climbed to $1.5 billion from $390 million a year ago. The company attributed the increase to higher gains on asset sales in Q4 2014 compared to the prior-year quarter as well as higher margins on sales of refined products. The company also reported growth in its international downstream operations, with earnings of $629 million in Q4 2014 up from $125 million in the year ago quarter. The increase was mainly owing to higher margins on sales of refined product as well as a beneficial change in effects on derivative instruments. Further, while foreign currency headwinds reduced earnings by $96 million a year earlier, the company lost a considerably lesser amount of $21 million in the fourth quarter of 2014.
The Way Ahead
While Chevron has been working towards increasing its oil and gas production, the process has been hit by plummeting oil prices amid an oversupply in the market. However, the company is not alone in the face of current difficulties. A number of oil producers and service companies have recently announced layoffs and spending cuts on new drilling projects. While BP (BP, Financial) announced plans to freeze worker payouts for 2015 on the back of disappointing Q4 results, Royal Dutch Shell (RDS, Financial) recently reported a 57% fall in its fourth-quarter profit. Further, although Exxon Mobil Corp. (XOM, Financial) reported better-than-expected Q4 earnings on improved downstream results, overall revenue for the quarter fell 21% from a year earlier.
Chevron, which announced plans to pare capital expenditure by 13% to around $35 billion and rework its cost structure, expects its financial strength to help meet the challenges of a volatile crude oil prices in 2015. Chevron, however, reaffirmed its growth outlook for the short to medium term on the back of positive developments in the company’s key under-construction projects including the Gorgon LNG Project, the Wheatstone, Angola LNG Project and the Gulf of Mexico Deepwater Projects. These projects are expected to drive the goal of reaching an average per day net hydrocarbon production of 3.1 million barrels of oil compared to the current 2.6 million barrels.
Final Thoughts
Chevron is USA’s second largest oil company in market value behind Exxon Mobil. Although downstream operations have proven profitable for the company in 2014, upstream operations have dragged down earnings, which is a worrisome aspect for investors.
While the company expects a number of its major projects to take off in the short to mid-term, growth in the upcoming years is likely to be rather sluggish owing mainly to the enduring effect of reduced crude prices. Moreover, with expert consensus estimates projecting a negative growth rate for the long-term, Chevron currently seems a less attractive option for investors.
