Morningstar | Chevron's 1Q Suffered From Weak Downstream Results; Management Confident in Anadarko Offer
Chevron’s first-quarter earnings fell to $2.6 billion from $3.6 billion a year ago, the result of lower commodity prices and weak downstream market environment. Upstream earnings slipped to $3.1 billion from $3.4 billion as lower oil and natural gas prices offset the benefit of higher production volumes. Production increased to 3,038 mboed from 2,852 mboed, or 7%, at the top end of management’s full-year guidance of 4%-7%, thanks to continued growth in the Permian and ramp-up of major capital projects such as Wheatstone LNG. Downstream earnings fell to $252 million from $728 million last year due largely to lower refined product and chemical margins. Cash flow from operations excluding working capital, fell to $6.3 billion from $7.1 billion last year. We expect cash flow generation to improve in the coming quarters, however, as higher oil prices lift upstream earnings and improved market conditions lift downstream earnings. Our fair value estimate and moat rating are unchanged.While management previously laid out a repurchase target of $1 billion per quarter this year, it was restricted from doing so given the offer to acquire Anadarko. Repurchases will likely remain on hold until the deal closes in the third quarter.
On that note, management expressed confidence that its agreement with Anadarko will hold despite the recent offer from Occidental Petroleum and noted inter-company teams have already begun work on integration. Recent news reports, however, suggest Anadarko management is taking Oxy’s offer under consideration, which might require Chevron to increase its bid. We wouldn’t be surprised if it did so as the deal makes sound strategic sense given the portfolio overlap in the Permian and Gulf of Mexico and entry into Mozambique. Our fair value estimate was unchanged after incorporating the offer for Anadarko. As such, the sell-off in shares following the acquisition announcement has shares trading in 4-star territory.
However, an increased offer would likely further weigh on shares.
Chevron is engaged in energy and chemicals operations. Upstream operations consist primarily of, among others, exploring for, developing and producing crude oil and natural gas; processing, liquefaction, transportation and regasification associated with liquefied natural gas, storage and marketing of natural gas; and a gas-to-liquids plant. Downstream operations consist primarily of, among others, refining crude oil into petroleum products; marketing of crude oil and refined products; and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives.
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