It's pretty safe to say that no matter what numbers Chevron (NYSE:CVX) posted in the first quarter, they still wouldn't have received much attention now that Chevron finds itself in a bidding war. While its results were fine considering lower oil prices and a weaker refining market to start the year, the company was able to still generate decent earnings and cash flow.
So let's look at some of the company's most recent results to see what investors may have missed among the acquisition hullabaloo and how investors should view this Wall Street drama.
By the numbers
|Metric||Q1 2019||Q4 2018||Q1 2018|
|Revenue||$35.20 billion||$42.35 billion||$37.76 billion|
|Net income||$2.65 billion||$3.72 billion||$3.64 billion|
|Operating cash flow||$5.1 billion||$8.0 billion||$5.0 billion|
Even though oil prices were down quite a bit from this time last year, it didn't affect the company's overall earnings results that much. The company was able to get better results from its U.S. upstream production assets, thanks to cost controls and higher volumes that helped to offset price declines. One of the more significant factors this past quarter was unusually low refining margins for the quarter.
Granted, Chevron is affected less than other integrated oil and gas companies, because it has a much smaller footprint in refining and chemical manufacturing, but it still had a notable impact.
- Chevron's total oil production checked in at 3.04 million barrels of oil equivalent per day (mmboe/d), up 7% from this time last year. The large gains were largely attributed to the addition of its Wheatstone LNG facility in Australia as well as the continued growth of its Permian Basin shale program.
- Unsurprisingly, the company's Permian Basin shale production continues to grow faster than management originally anticipated. While it didn't break out the numbers specifically this quarter, it did mention during its security analyst meeting in March that it increased its medium-term production target. It now expects to produce about 900,000 million barrels of oil equivalent from the Permian by 2023 and that those operations will be cash flow positive in 2020.
- Management is also starting to give more details about its other shale positions and how they will fit into management's strategy over the next few years. Chevron estimates that its shale acreage in Argentina, Canada, and the Appalachian region of the U.S. will be the second largest production growth source for the company. These new shales and the Permian will account for 1.25 mmboe/d of its 1.5 mmboe/d in new production target in 2023.
- The company also announced that it has sold its interests in the Rosebank offshore field in the United Kingdom, the Frade field in Brazil, and completed the sale of its Denmark operations. Management's plan is to sell about $5 billion to $10 billion in the 2018-2020 period. So far, it has completed about $2.3 billion of these asset disposals.
What management had to say
The biggest story on Wall Street right now is Chevron's deal in place to acquire Anadarko Petroleum (NYSE:APC) for $33 billion. Or at least that was the plan until Occidental Petroleum (NYSE:OXY) decided to offer an unsolicited bid for Anadarko at $38 billion and brought in Warren Buffett to help fund the deal.
On the company's earnings conference call, pretty much every question that analysts asked related to either its offer or Occidental's, especially how each company expects to extract value from Anadarko's large holdings in the Permian Basin. Here's why CEO Michael Wirth thinks it will be able to extract more value Anadarko's holdings than others.
[W]e've seen in the past, Permian operators that will optimize certain metrics, particularly things like early production. We don't -- we're very careful about choke management, to deliver the best, ultimate recovery, but there are other operators that run with their chokes wide open and can show very strong early production numbers. You look at it a year out, and there's quite a different picture that you see.
So I think, number one, I would say you have to be very careful about which metrics you look at. And we're focused on value creation and returns. Short-term production is not the goal, and we're really looking at driving ultimately long-term recoveries, a capital-efficient model that generates leading EURs, low cost per barrel and high returns. And you take that and you put it together with an advantaged royalty position, and we can deliver value that is difficult for anyone else to match.
You can read a full transcript of Chevron's conference call.
Don't go chasing waterfalls
It's worth pointing out that Chevron's production gains in the Permian Basin are from better individual well performance than from management's electing to spend more money to drill. The amount of oil recovered per well in the Delaware Basin is now estimated to be greater than 2 million barrels, and the per-barrel development costs have declined 40% since 2015.
That should bode well for it as Anadarko Petroleum's board considers the two offers on the table. Chevron's offer seems to be more geared toward long-term value for Anadarko's shareholders as the terms offer more stock than cash for each of Anadarko's shares even though the current offer has a lower price tag than Occidental's.
While it would be great to add Anadarko to the mix, Chevron should probably shy away from getting into a bidding war with Occidental. The lengths to which Occidental is going for this deal already smell of desperation, and the worst-case for scenario is it loses out on the deal, gets to pocket a $1 billion breakup fee, and makes offers for the $10 billion to $15 billion in assets Occidental says it will make as part of its proposed deal.
For now, Chevron doesn't seem to be budging from its current offer, and that should be encouraging to shareholders. It already has a plan in place that will generate value, so there is no need to do anything rash now.