Why Chevron is a good buy despite poor results?What’s Positive for Investors?How to Enhance Financial HealthConclusion
Chevron Corporation (NYSE:CVX) stock has soared by 14.55% Year-to-Date (YTD), but its 1Q results are far below than satisfactory. The US integrated oil major reported net loss of $725 million, or net loss of $0.39 per share.
The poor performance was mainly because of persistent depressed crude oil prices as evident from its upstream performance which reported a loss of $1.46 million. The downstream segment was also unable to offset poor performance of upstream segment. Its earnings from downstream segment amounted to $735 million, which were much lower than earnings of $1.423 billion in same period a year ago.
The earnings break-up in above image highlights the difficulties oil companies are facing due to lower range of oil prices.
What’s Positive for Investors?
In response to lower crude prices, Chevron has decided to calm down its investors by trimming its Capital Expenditure (CAPEX) and operating expenses.
Chevron had already lowered its Capital and exploration expenses in 2015 as compared to 2014, but has set out plans to even lower this expenditure for current year. The above image depicts that its guidance for upcoming quarters is much lower than 1Q.
Similarly, its operational expenditure and Selling, General and Administrative (SG&A) expenses are also on the lower range as guidance for future is way below current and past levels.
Apart from lower expenditure, its future revenue stream from projects in pipeline also presents significant upside to the stock. Its Gorgon Liquefied Natural Gas (LNG) project has been completed, but production from Train-1 is halted temporarily because of technical failure. It is expected to commence production this month, while Train-2 and Train-3 start-up timing is expected to become operational this year.
Wheatstone LNG is also nearing completion, with first LNG expected by mid of next year.
How to Enhance Financial Health
Chevron, in its investor presentation, mentioned that it estimates asset sales of about $5-$10 billion for current year. The divestment criteria would be that assets which no longer fit with Chevron’s strategy and are unable to compete for capital, are disposed. Moreover, it also mentioned that Chevron would dispose only those assets of which fair value is received by the company.
Chevron’s 1Q earnings were below par, as no investor would like to invest in a company which is incurring heavy losses. But considering future revenue expectations from Chevron’s mega projects and active decision making from its management, adds value to investment. Moreover, if oil prices recover, it would be further value addition to the investment in the oil major.