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Chevron posts earnings beat on aggressive expansion in Permian Basin

A Chevron project in the Permian Basin. ( Photo: Chevron )

Chevron has entered into ‘definitive agreement’ to acquire Anadarko

Chevron (NYSE: CVX) reported its financial results for the first quarter of 2019 before markets opened on April 26. CVX posted earnings per share (EPS) of $1.39, beating Wall Street consensus expectations of $1.30 per share.

Operating revenues were down 5.5 percent year-over-year to $34 billion from $36 billion in the first quarter of 2018. Net earnings also dropped significantly, from $3.6 billion a year ago to $2.6 billion in the first quarter of 2019. Still, CVX returned $2.7 billion to shareholders in the form of stock buybacks ($500 million) and dividends ($2.2 billion).

Chevron said that ‘foreign currency effects’ decreased earnings by $137 million in the first quarter. Multinational companies based in the United States often post weaker earnings in periods when the dollar strengthens against foreign currencies because overseas revenue in euros, for instance, converts to fewer dollars on the companies’ balance sheets.

“Upstream production volumes were up 7 percent from a year ago, primarily in the Permian Basin and at Wheatstone in Australia. The company’s net oil-equivalent production exceeded 3 million barrels per day for the second quarter in a row. First quarter earnings declined from a year ago, largely due to lower crude oil prices and weaker downstream and chemicals margins,” said Michael Wirth, Chevron’s chairman of the board and chief executive officer, in a statement.

The chart below displays the price of West Texas Intermediate (WTI) crude oil, the primary benchmark for American oil, over the past year, clearly showing that the price of WTI was lower year-over-year for the majority of the first quarter of 2019.

 ( Chart: Bloomberg )
( Chart: Bloomberg )

Chevron breaks out its revenues into four key categories – U.S. upstream, U.S. downstream, international upstream and international downstream. Upstream refers to the early links in the petroleum value chain, including the exploration, production and sale of crude oil, while downstream refers to the sale of distillate products like gasoline and petrochemicals.

In terms of freight demand, the most important category is U.S. upstream, because Chevron is rapidly expanding its operations in the oil-and-gas-rich Permian Basin. Tight shale formations in the Permian Basin – centered in West Texas – require the use of hydraulic fracturing and horizontal drilling techniques to access oil and gas. The water, chemicals and proppant required for fracking, as well as the frequent equipment moves associated with fracking, drive an inordinately high demand for trucking capacity compared to conventional drilling.

“Net oil-equivalent production of 884,000 barrels per day in first quarter 2019 was up 151,000 barrels per day from a year earlier,” Chevon wrote. “Production increases from shale and tight properties in the Permian Basin in Texas and New Mexico, and major capital projects and base business in the Gulf of Mexico, were partially offset by normal field declines and the impact of asset sales.”

Earnings for the U.S. upstream division grew 15.4 percent to $748 million compared to $648 million in the first quarter of 2018. The bridge chart below shows how the lion’s share of CVX’s production growth came from “Shale & tight” production, 143,000 oil-equivalent barrels per day (MBOED). An oil-equivalent barrel is a metric used to combine crude oil and natural gas production into a single number – it converts a certain number of cubic feet of natural gas produced to oil based on the energy released from burning the two commodities.

 ( Chart: Chevron )
( Chart: Chevron )

Chevron’s guidance is for 4-7 percent upstream growth in 2019.

Finally, Chevron announced that it has entered into a “definitive agreement” to acquire Anadarko Petroleum Corporation.

“The combination of Anadarko’s high-quality assets and people with Chevron’s portfolio strengthens our leading position in the Permian, builds greater deepwater Gulf of Mexico capabilities and will grow our LNG [liquid natural gas] business,” Wirth said. “We believe this transaction will unlock significant value for shareholders.”

John Paul Hampstead

John Paul conducts research on multimodal freight markets and holds a Ph.D. in English literature from the University of Michigan. Prior to building a research team at FreightWaves, JP spent two years on the editorial side covering trucking markets, freight brokerage, and M&A.