Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 1Q18 Earnings Update
Prev. Ed.: Apr 16, 2018; Change in Estimates (broker material considered till Apr 12, 2018)
Brokers’ Recommendations: Neutral: 18.75% (3); Positive: 81.25% (13); Negative: 0% (0) Prev. Ed.: 4; 13; 0
Brokers’ Target Price: $145.67 (↑ $4.23 from the last edition; 9 firms) Brokers’ Avg. Expected Return: 16.4%
*NOTE: Though dated May 11, 2018, share price and broker materials are as of Apr 30, 2018.
Note: A flash update was done on Apr 27, 2018: 1Q18 Earnings Release
Note: The tables below (Revenues, Margins, and Earnings per Share) contain material from fewer brokers than in theValuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Chevron Corporation (CVX) operates as an integrated energy company worldwide. The company's operations range from energy exploration and production to refining and retail marketing. Chevron’s business development portfolio includes biofuels, gas-to-liquids, renewable energy and others.
Of the 16 firms in the Digest group covering the stock, thirteen assigned positive ratings and three firms rendered neutral ratings to the stock. The firms provided the lowest target price of $128 (2.3% down from the current price) and a highest target price of $160 (27.9% upside from the current price) with the average price being $145.67.
In a consensus of brokerage opinions, Chevron has one of the more promising sets of oil and gas prospects among the major integrated companies. Given the wide portfolio of new projects that could significantly boost production, reserves, earnings, cash flow, and stock valuation, the firms remain optimistic on the growth potential.
The following is a summarized opinion of the diverse brokerage viewpoints:
Positive or equivalent (81.25%; 13/16 firms): The bullish firms believe that Chevron remains poised for production growth on the back of solid execution of its major high-margin capital projects, with Australian LNG and Permian projects being the key driver. They think that Chevron’s portfolio is the most strategically positioned and is one of the more oil-weighted players among the integrated majors, thereby likely to get hugely benefited by rising oil prices.
The firms believe Chevron boasts of stronger financials when compared to its peers. Moreover, the company’s strong cash flows, which sufficiently cover capex and dividend payments, are the real assets of the company and provide it with ample flexibility.
Further, the firms believe that the cash flow position of the company will keep on getting stronger with project completions, which will reduce the operating costs. Rebounding oil prices and reduced spending thus bode well for the company. The firms believe that with continued operational efficiency, and increasing cash flows, share buybacks are likely to resume in the latter half of this year. They are of the opinion that Chevron will maintain its impressive dividend record and will grow its dividend yield every year through the end of the decade.
Neutral or equivalent (18.75%; 3/16 firms): The neutral firms believe that Chevron is well positioned and lacks the structural headwind of high gas exposure compared to its peers. They also like the company’s strong cash flows and operational efficiencies. However, these firms believe that the production volumes of the company are slowing down and need to get stronger for the company to flourish. These firms believe that the company doesn’t have many megaprojects in the pipeline until the Tengiz expansion in 2022. Also, while these firms appreciate the free cash flows of the company, they remain skeptical about the buyback resumption plans of the company.
May 11, 2018
Overview
Based in San Ramon, CA, Chevron Corporation (CVX) is an integrated oil and gas company engaged in exploration and production; refining, marketing and transportation; chemicals manufacturing and sales; lubricants; supply and trading; and power generation. The upstream segment primarily operates in the deepwater U.S. Gulf of Mexico, offshore Western Australia, West Africa, shale and tight resource plays in the United States and Canada. The downstream segment has primarily U.S. and Asia-Pacific refineries, with others in Europe, Africa, and Canada. Six of the company’s core refineries— in Singapore, Thailand, South Korea, and Richmond, El Segundo and Pascagoula— constitute over 88% of its total crude refining capacity. The company holds 50% interest in Chevron Phillips Chemical Co. Chevron has nearly 17,000 retail sites worldwide that market refined products under the Chevron, Texaco, and Caltex brands. In 2017, Chevron produced 2.73 million barrels of net oil-equivalent per day, compared with 2.59 million barrels per day in the 2016. The company operates on a calendar-year basis. More information on Chevron is available at https://www.chevron.com/
The firms identified the following factors for evaluating investment merits of Chevron:
Key Positive Arguments / Key Negative ArgumentsFundamentals
· Excess cash enabling debt reduction and increase in dividend and acquisition ability.
Growth Opportunities
· Multi-year program of growth in oil and gas production over the next several years through a highly visible portfolio of projects.
· Strong current and expected LNG demand in the Asia-Pacific region, to which CVX has strong leverage.
· Permian investment ramp-up plans to boost production further.
Competitive Advantages
· Leading deepwater acreage position
· More strategically advantaged portfolio than its peers along with less structural headwind due to little exposure to the gas market. / Fundamentals
· U.S. production weighed down by asset sales and natural field declines.
Growth Impediments
· Large asset base in mature areas in the U.S. and Europe that suffer high decline rates.
· Operational challenges concerning its projects.
Competitive Threats
· Above-average earnings volatility due to CVX’ high leverage to oil prices.
· Return on capital employed (ROCE) lags peers.
Macro Issues
· Risk from global economic weakness.
May 11, 2018
Long-Term Growth
Chevron’s primary strategic objectives seek to balance growth with returns through improved performance in the base exploration and production (E&P) business and development of high-return projects, development of refining and marketing (R&M) activities, portfolio management across the organization, and advantage of technology on a global basis.
The firms regard Chevron as an attractive long-term investment option, owing to its high accessibility to oil plays and less exposure to North America’s natural gas market. Chevron remains poised for production growth through 2022 on the back of solid execution of its major high-margin capital projects, with Australian LNG and Permian projects being the key driver, along with various other projects including higher offshore Gulf of Mexico output from Stampede and Big Foot projects. Contribution from Hebron project in eastern Canada and Clair Ridge project in the United Kingdom is also expected to enhance the production growth.
The company’s strong cash flows and healthy dividend payouts bode well for the long-term prospects. In early 2018, the company raised its dividend by around 4%, marking the largest hike since the oil slump. The firms believe that the dividend payouts to increase over time with cost cuts efforts and improving cash flows.
May 11, 2018
Target Price/Valuation
Provided below is the summary of valuation and ratings as compiled by the Zacks Digest:
Rating DistributionPositive / 81.25%↑
Neutral / 18.75%↓
Negative / 0%
Average Target Price / $145.67↑
Digest High / $160
Digest Low / $128
No. of Firms with Target Price/Total / 9/16
Chevron operates in various countries and thus remains exposed to commodity price fluctuations, political & environmental risks, geological and regulatory risks. Risks to the price target also include a concentration risks associated with several large development projects, pull back in the commodity prices and operational production shortfalls.
Recent Events
On Apr 27, 2018, Chevron reported stronger-than-expected first-quarter earnings amid the recovery in oil prices and production gains. The company reported earnings per share of $1.90, significantly ahead of the Zacks Consensus Estimate of $1.45. The bottom line also improved significantly from the year-ago profit of $1.41. Quarterly revenues of $37,764 million lagged the Zacks Consensus Estimate of $38,737 on refining weakness but was up 13% year over year.
On April 25, 2018, Chevron announced a quarterly dividend payout of $1.12 per share, in line with the previous payout. This translates to an annualized dividend of $4.48 per share. The dividend will be paid on Jun 11, 2018, to shareholders of record as of May 18, 2018.
Revenue
Chevron operates through three main segments: Exploration and Production (or Upstream); Manufacturing, Products, and Transportation (or Downstream); and Other Businesses.
Per the Zacks Digest Model, the company reported total revenue of $37,764 million in 1Q18 compared with $33,421 million in 1Q17 and $37,616 million in 4Q17.
Revenue ($ M) / 1Q17A / 4Q17A / 2017A / 1Q18A / 2Q18E / 2018E / 2019E / 2020EDigest High / $33,421.0 / $37,616.0 / $141,722.0 / $37,764.0 / $38,456.6 / $160,287.4 / $163,575.3 / $158,283.0
Digest Low / $33,421.0 / $37,616.0 / $141,722.0 / $37,764.0 / $37,636.0 / $148,530.0 / $157,695.0 / $158,283.0
Digest Average / $33,421.0 / $37,616.0 / $141,722.0 / $37,764.0 / $38,046.3 / $154,408.7 / $160,635.2 / $158,283.0
Y-o-Y Growth / 41.9% / 19.4% / 23.8% / 13.0% / 10.3% / 9.0% / 4.0% / -1.5%
Q-o-Q Growth / 6.1% / 3.9% / 0.4% / 0.7%
Upstream
Per the Zacks Digest Model, Chevron’s worldwide net oil-equivalent production was 2,851.9 thousand barrels per day in 1Q18, increased 6.6% from the year-earlier and 4.1% sequentially.
The rise in output is primarily attributed to contributions from major capital projects, especially the major Australian LNG projects—Wheatstone and Gorgon along with Permian projects.
In the United States, net oil-equivalent production totaled 732.5 thousand barrels per day in 1Q18, up 9.1% both year over year (y-o-y) and sequentially. The net liquids component of production was 567 thousand barrels per day, up 9.5% from 4Q17 and 12.5% from 1Q17. Net natural gas output was 993 million cubic feet per day, down 1.3% and up 7.9% from 1Q17 and 4Q17, respectively.
Internationally, net oil-equivalent production was 2,119.3 thousand barrels per day in 1Q18, up 5.7% and 2.4% from 1Q17 and 4Q17, respectively. The net liquids’ component of output decreased 1.5% year-over-year to 1,186 thousand barrels per day in 1Q18. The net liquids production recorded a year-over-year decline of 0.8%. Net natural gas output was 5,600 million cubic feet per day, up 16.6% y-o-y and 6.8% from the prior quarter level.
Per the company, In the United States, the company’s average sales price per barrel of crude oil and natural gas liquids was $56 in the quarter under review as against $50 in 4Q17 and $45 in 1Q17. The average sales price of natural gas was $2.02 per thousand cubic feet, compared with $2.39 in last year’s first quarter and $1.86 in the prior quarter.
Internationally, the average sales price for crude oil and natural gas liquids in 1Q18 was $61 per barrel, up from $49 a year earlier and $57 in 4Q17. The average price of natural gas was $5.85 per thousand cubic feet, compared with $4.36 in the prior-year quarter and $4.93 in the prior quarter.
Downstream (Per the company)
In the quarter under review, the U.S. refined product sales totaled 1,185 thousand barrels per day, up 2.8% year-over-year and 1.1% sequentially. Refinery crude input was 930 thousand barrels per day in up 11.5% from 4Q17 level and 2% from 1Q17 level.
Internationally, total refinery crude input was 712 thousand barrels per day, down 6.4% and 6.1% sequentially and year-over-year, respectively. The total refined product sales amounted to 1,436 thousand barrels per day as against 1,518 thousand barrels per day in 4Q17 and 1,445 thousand barrels per day in 1Q17.
Outlook
Chevron’s production outlook remains one of the most robust in its peer group, on the back of several projects especially the Australian LNG projects—Gorgon & Wheatstone. The firms are also optimistic about the production from the Permian Basin and the fact that the company is ramping up its investment in the key shale play. Other key areas of growth include Angola, Kazakhstan and Gulf of Mexico. The firms expect impressive production growth trend through 2022.
The Zacks Digest model forecasts revenues of $154,408.7 million for 2018, $160,635.2 million for 2019 and $158,283 million for 2020, with a y-o-y growth of 9% in 2018, 4% in 2019 and y-o-y decline of 1.5% in 2020.
Please refer to the Zacks Research Digest spreadsheet of CVX for specific revenue estimates.
Margins
Upstream
Per the Zacks Digest Model, the segmental earnings (as per GAAP) in 1Q18 were $3,412 million compared with the earnings of $1,517 million and $5,291 million in 1Q17 and 4Q17, respectively. The significant y-o-y increase in production can be attributed to the contribution from the company’s major capital projects and stronger price realizations.
Downstream
Per the Zacks Digest Model, the segmental earnings (as per GAAP) in 1Q18 were $728 million compared with $1,279 million and $926 million in 4Q17 and 1Q17, respectively.
Other
The other business includes cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities and technology companies.
Per the Zacks Digest Model, the company’s net loss (GAAP) in 1Q18 was $442 million, compared with net loss of $3,459 million and an income of $239 million in 4Q17 and 1Q17, respectively.
Outlook
The bullish firms expect the company to generate stronger cash flow from cost-cut efforts and commencement of mega projects along with higher contributions from existing capital projects. They believe that steady operations at Australia’s Gorgon LNG project and production growth in its Permian Basin operations will drive Chevron’s margins.
Segment Earnings After Tax (All Figures as per GAAP) / 1Q17A / 4Q17A / 2017A / 1Q18A / 2Q18E / 2018E / 2019E / 2020EU.S. / $80.0 / $2,855.5 / $3,164.3 / $648.0 / $754.0 / $2,803.0 / $3,967.0 / $4,599.0
International / $1,437.0 / $1,603.0 / $4,510.0 / $2,704.0 / $1,895.0 / $8,113.0 / $10,494.0 / $10,319.0
Total E&P / $1,517.0 / $5,291.0 / $8,150.0 / $3,412.0 / $2,876.0 / $12,792.9 / $14,440.9 / $14,918.0
US / $469.0 / $760.0 / $2,503.0
International / $457.0 / $84.0 / $2,276.0 / $286.0 / $501.0 / $1,634.0 / $1,869.0 / $2,402.0
Total R&M / $926.0 / $1,279.0 / $5,214.0 / $728.0 / $1,020.0 / $3,412.8 / $3,440.3 / $4,202.0
Other / $239.0 / ($3,459.0) / ($4,169.1) / ($442.0) / ($500.0) / ($1,942.0) / ($2,000.0) / ($1,800.0)
Total Net Income / $2,682.0 / $3,111.8 / $9,195.6 / $3,638.0 / $3,422.3 / $14,480.2 / $16,254.3 / $17,320.0
Please refer to the Zacks Research Digest spreadsheet of CVX for more details.