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Chevron's (CVX) Upstream Unit Looks Bullish Pre Q3 Earnings

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It's earnings season again and oil supermajor Chevron CVX is getting ready to release its third-quarter results on Oct 29. This time around, the primary contributor to the company’s earnings — its upstream (or exploration and production) division — is likely to have benefited from the ongoing momentum in oil and natural gas prices. Chevron also has a downstream business, which refines crude oil into fuels like gasoline and diesel oil.   

Click here for a complete rundown of the company’s expected Q3 performance.

Chevron has extensive upstream operations in all major hydrocarbon-producing regions of the world. The Zacks Rank #1 (Strong Buy) company is primarily involved in the acquisition, development and exploitation of crude oil and natural gas properties.

You can see the complete list of today’s Zacks #1 Rank stocks here.

A Look at Chevron’s Upstream Performance in Q2

Chevron’s production of crude oil and natural gas increased 4.6% from the year-earlier level to 3,126 thousand oil-equivalent barrels per day/MBOE/d (59% liquids) and it was the third successive quarter where volumes topped 3 million barrels per day. The year-over-year rise reflects the contribution from the Noble Energy acquisition and lower production curtailments.

The U.S. output increased 14.6% year over year to 1,136 MBOE/d but the company’s international operations (accounting for 64% of the total) edged down 0.4% to 1,990 MBOE/d.

Apart from higher production, Chevron also experienced a significant improvement in commodity prices. At $54 per barrel, Chevron’s average realized liquids prices in the United States were 184.2% above the year-earlier levels while prices overseas surged 195.2%.

The dual catalyst of increase in volumes and realizations meant that Chevron’s upstream segment recorded a profit of $3.2 billion in the second quarter of 2021, turning around from the $6.1 billion loss in the year-ago period when the energy sector was devastated by the pandemic-induced demand destruction and price plunge.

Commodity Prices Strengthen in Q3

Benchmark oil prices have risen sharply in 2021, thanks to surging demand from the economic reopening and an improving supply-demand narrative. With fundamentals pointing to a tighter market, the Zacks Consensus Estimate for the average sales price for crude in third -quarter 2021 is $70 per barrel, up significantly from a year earlier when the company fetched $31 in the U.S. and $39 overseas.

Though the company maintains an oil-heavy production mix, natural gas still contributes around 40% to the total volume. This healthy exposure to natural gas could also work in Chevron’s favor as the price of natural gas has soared compared to the year-ago levels. As a matter of fact, the Zacks Consensus Estimate for the third-quarter average sales price for natural gas in the United States is pegged at $2.95 per thousand cubic feet compared to just 89 cents in the corresponding period of 2020.

Chevron, like its peers ExxonMobil XOM, Royal Dutch Shell (RDS.A) and BP plc BP, is set to benefit from the spike in crude and natural gas prices. For the to-be-reported quarter, the Zacks Consensus Estimate for the upstream segment is pegged at a profit of $3.8 billion, indicating a massive jump from the prior-year quarter’s income of $235 million.

Higher Production to Further Aid Upstream Income Generation

Chevron seems one of the best-placed global integrated oil companies to achieve sustainable production ramp-up, driven by the big Australian LNG projects (Gorgon and Wheatstone), deepwater developments in the U.S. Gulf of Mexico, the showpiece Permian Basin region and last year’s Noble Energy acquisition.

The Zacks Consensus Estimate for the third-quarter output is pegged at 3,053 MBOE/d. The projection suggests an increase of 7.7% from the figure reported in the year-ago quarter.

Overall Earnings & Revenue Projections

The Zacks Consensus Estimate for third-quarter earnings of Chevron is pegged at $2.21 per share, suggesting a massive improvement from the prior-year quarter’s reported figure of 11 cents. For quarterly sales, the consensus mark of $42.5 billion suggests a rise of 73.7% from the year-earlier quarter’s reported number.

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