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Morningstar | Chevron Closes Out Strong 2018, Looks for Repeat Performance in 2019

Chevron’s fourth-quarter earnings increased to $3.7 billion from $3.1 billion last year, which included $2.0 billion in tax benefits, on higher oil prices and a 12.5% increase in production volumes. Upstream earnings totaled to $3.3 billion for the quarter compared with $5.3 billion a year ago, which included a tax benefit of $3.3 billion. Production increased to 3,083 mboed from 2,740 mboed last year as the Wheatstone and Gorgon projects continue to ramp up and Permian volumes increased 84% to 377 mboed, continuing to far outpace guidance laid out earlier this year. Full-year production growth came in at 7%, in line with management’s latest guidance. Management expects a second consecutive year of strong production growth, issuing guidance of 4%-7% for 2019 on continued shale growth and the Wheatstone ramp-up. Downstream earnings fell to $859 million from $1.3 billion but registered underling improvement excluding last year’s $1.2 billion tax benefit on stronger margins.

For the full year, operating cash flow grew to $30.6 billion from $20.3 billion last year. Chevron repurchased another $1 billion worth of shares during the quarter, bringing its full-year total to $1.8 billion. It plans to repurchase another $1 billion in the first quarter, nearly completing its initial $3 billion program. Absent further deterioration in oil prices, we’d expect more to follow. Our fair value estimate and moat rating are unchanged.

Chevron also announced a deal to acquire Petrobras’ 110 mbd Pasadena, Texas, refinery for $350 million plus working capital. At $3,200 per capacity barrel, the deal is in line with U.S. refinery transactions of the recent past. It makes strategic sense given Chevron’s growing Permian production and the ability to integrate with its Pascagoula, Mississippi, refinery. While Permian prices have likely reached their nadir given upcoming pipeline capacity, discounts will likely persist offering Chevron the ability to recapture value otherwise lost.

Next on the agenda is the company’s annual analyst day in March. We expect an extension of the company’s guidance beyond 2020, including capital spending plans, with a focus on future growth as management attempts to assuage market concerns about the company’s outlook considering the loss of a couple key PSCs in Asia. We also expect Permian production guidance will be increased given how far above plan the volumes currently are (about 100 mboed).