It's not that uncommon to see a small independent oil and gas producer to post 10% production growth rates. For a massive company like Chevron (NYSE:CVX) to pull off that feat is an entirely different story. Several major capital project start-ups helped push the company's production rates -- and earnings -- higher this quarter, and they helped it get closer to a management target for 2017.

Let's take a look at Chevron's most recent quarterly results as well as examine how it was able to grow production by so much in such a short time.

Oil platform under construction

Image source: Chevron.

Chevron's results: The raw numbers

Results Q2 2017 Q1 2017 Q2 2016
Revenue $34,877 million $33,421 million $29,282 million
Net income $1,450 million $2,682 million ($1,470 million)
Earnings per share $0.77 $1.41 ($0.78)
Cash flow from operations $5,036 million $3,879 million $2,531 million

Data source: Chevron earnings releases. 

For an integrated oil and gas company, Chevron is heavily weighted toward the production side of the business. So when the company's upstream segment performs well, then you can expect the overall bottom line to reflect that. Even though net income was lower than the prior quarter, most of that related to one-time gains in the first quarter and charges in the second quarter. These items are mostly non-cash events, though, and only impact earnings without changing the physical cash in the business.

Speaking of cash, this is the first quarter in a long time that Chevron was able to cover all of its capital expenditures with cash flow from operations. In fact, it was almost enough to cover capital spending and dividend payments. With Gorgon LNG fully operational and Wheatstone Train 1 complete, capital expenditure requirements have gone down substantially, and those assets are starting to be cash contributors. 

Breaking down Chevron's earnings by business segments, the weak point continues to be U.S. Upstream. Part of this is because product realization prices in the U.S. are still low -- Chevron realized an oil price of $41 a barrel in Q2. The other weak point in this report was international downstream earnings that suffered from downtime at its refineries in Thailand and South Africa.

CVX earnings by business segment for Q2 2016, Q1 2017, and Q2 2017. Shows both upstream segments growing significantly with downstream segments maintaining steady results

Data source: Chevron earnings release. Chart by author.

What happened with Chevron this quarter?

  • Overall upstream production grew a whopping 10% year over year to 2.78 million barrels of oil equivalent per day. Almost all gains came from bringing major capital projects online including Gorgon, Angola LNG, Jack/St. Malo, and Alder. Those gains were slightly offset by a lower contribution from its production-sharing contracts in places like the Saudi Arabia/Kuwait Partitioned Zone.
  • While the company did not complete any notable asset sales in the quarter, management did state that several assets are for sale. Chevron intends to sell another $5 billion in assets before the end of the year. 
  • The Permian Basin continues to be a rock-star asset. Chevron ended the quarter with production around 175,000 barrels per day. Management didn't expect to reach that production rate until the middle of 2018 under even the most optimistic projections. Thanks to lower drilling and lease operating costs, Chevron now estimates its 2017 Permian wells' internal rate of return is greater than 30% with oil at $50 a barrel. At this rate, it will blow by management's 2015-2020 projections.
  • After a light cash flow first quarter, Chevron has now generated $8.9 billion in cash, well above the $6.5 billion in capital spending. Management wants to have cash from ops cover expenditures and dividends for the entire year. It's running a little short of that goal now, but it does look attainable if it can have another quarter like the most recent one. 

What management had to say

In the company's press release, CEO John Watson's statement discussed both the large bump in production this quarter as well as the significant reductions in spending that should put the company on track to meet that cash flow goal for the year:

Second-quarter results improved substantially from a year ago and year-to-date net cash flow is positive. We're delivering higher production with lower capital and operating expenditures. Oil and gas production was up 10 percent in the second quarter from a year ago. Our Gorgon LNG Project in Australia closed the quarter running above nameplate capacity and we had record production from our shale and tight resource in the Permian Basin. First production from the Wheatstone LNG Project is expected next month. Operating expenses were down 10 percent and capital spending was down 25 percent in the first six months of the year versus 2016.

10-second takeaway

Chevron is a little late to the cash-flow party compared to some of its peers. It is still winding down spending while others are starting to open up their wallets to take advantage of cheap service contracts and low prices for exploration licenses. With that goal of free cash flow positive by the end of the year in sight, though, Chevron might start to change its tone. With Gorgon on line and Wheatstone set to be fully operational in the next six to eight months, there is a lot more room in the company's capital spending budget. These next few quarters are going to be interesting for Chevron as it charts a new path toward growth again.

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