Chevron's Earnings Continue to Fall in the Second Quarter

Image source: Chevron investor presentation.

Chevron's (CVX 0.44%) second quarter probably didn't go as some investors might have hoped. Although oil prices were a little higher this past quarter than in the first quarter of 2016, other factors like refining margins and lower natural gas prices took a toll on profits. Plus, there were some pretty big non-cash impairment charges to boot that wiped out any chance at turning a profit.

Here's a quick snapshot of the company's earnings, a few highlights for the quarter, and where management thinks it will go from here. 

Chevron's results: The raw numbers

Data source: Chevron earnings release.

Chevron's results aren't as bad as those numbers look. In the second quarter, the company realized $2.8 billion in non-cash charges. The company didn't break out those charges, so we can't really tell exactly what they mean, but without them, we can assume that the company would have at least of generated some modest profits in the quarter. 

A reoccurring theme for Chevron's recent earnings has been extremely weak upstream production earnings. Those could be a lot better, but without knowing how those non-cash charges break out, we can't get a more clear picture of the company's operational performance. The company did benefit from higher oil prices in those segments, but those were also partially offset by lower gas prices and lower production levels. 

One thing to keep in mind when comparing this quarter to the same quarter last year is that the company did net a $1.6 billion gain in the second quarter of 2015 from the sale of its Caltex Australia assets. If we strip out that gain from last year, then its international downstream earnings were just $625 million. 

Data source: Chevron earnings release, author's chart.

On the cash side of the business, things didn't look much better. The company generated $3.7 billion from operational cash flow and asset sales, and after working capital adjustments. That's well below the $6.5 billion it spent on capital expenditures and dividends in the quarter. Based on these results, it's getting harder and harder to see the company achieve its goal of cash flow neutrality by the end of next year. 

Image source: Chevron investor presentation.

What happened with Chevron this quarter?

• Net oil equivalent production for the quarter was down 138,000 barrels per day to 2.53 million boe per day. A decent chunk of those declines were from planned turnaround work, but there were also some outages related to the Canadian wildfires, security issues in Nigeria, and some production sharing issues related to the Partitioned Zone between Kuwait and Saudi Arabia.
• Gorgon LNG's Train 1 was back up and running at 70% capacity for the quarter. Chevron expects Train 1 to reach full capacity by the fourth quarter, and Train 2 will start production at the same time. Wheatstone LNG remains on track for its first cargoes in the middle of 2017.
• There were no major start-ups this quarter, but Chevron's Chuandongbei gas project did bring its third processing train online. Three major start-ups are slated in the second half of the year, with Angola LNG back up and running in the third quarter after repairs and maintenance work.
• Chevron and partner ExxonMobil (XOM 0.02%) made a final investment decision on a $36.8 billion expansion of the Tengiz project in Kazakhstan. The project will boost production by 260,000 barrels of oil equivalent per day and will increase total recovery from the facility by 2 billion barrels of oil equivalent.
• Chevron has set a target for asset sales of $5 billion to $10 billion this year. So far, the company has completed $1.4 billion in asset sales.

What management had to say

Aside from the typical statements of cutting costs and operational efficiency, CEO John Watson went out of his way to mention the Tengiz project:

We continue to make progress toward our goal of getting cash balanced. Our operating expenses and capital spending were reduced over $6 billion from the first six months of 2015. In addition, we're bringing our major capital projects to completion. We have restarted LNG production and cargo shipments at Gorgon and Angola LNG, and started up the third train at the Chuandongbei Project in China. Construction at our other key projects is progressing, and we expect additional start-ups later this year. As these projects continue to ramp up, they are expected to increase net cash generation in future quarters. We recently announced the final investment decision on the Future Growth and Wellhead Pressure Management Project at Tengiz in Kazakhstan. The project represents an excellent opportunity for the company. It builds on our strong track record at Tengiz and is expected to create future value for our shareholders.

The Tengiz project was also featured heavily in the investor presentation for the quarter. Part of the reason management highlighted this piece is that $38 billion price tag, but it's also something that is different than what the company had said it was planning to do. In most of its recent conference calls and investor presentations, Chevron's management has said it was moving away from very large capital projects and focusing on smaller, faster-to-develop resources like shale. Chevron claims it can implement this project at a per barrel production cost of $18. If that's the case, then perhaps it's worth it.

10-second takeaway

Chevron's earnings don't look good, but they are skewed by some pretty large charges that hampered any chance at a profit. Management has stressed cost management and getting to cash flow neutral by 2017, but it's going to take a lot more work -- or a big assist from oil and gas prices -- to get there.