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Ouch! Why Chevron Posted a $6 Billion Loss in Q4 2019

By John Bromels - Feb 3, 2020 at 9:04AM

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Appalachian shale gas was the top reason the energy giant underperformed expectations.

Big oil has been in big trouble this earnings season, and oil major Chevron (CVX 2.32%) hasn't been immune. The company reported an eye-popping $6.6 billion loss in the fourth quarter on Jan. 31. While that wasn't entirely unexpected (for reasons I'll outline below), a top-line miss sent shares tumbling following the release. 

Silver linings were few and far between in the earnings report. Here's what investors should know. 

A man with his palm to his forehead

Oil and gas company Chevron had its worst quarterly loss ever in Q4 2019. Image source: Getty Images.

By the numbers

Metric Q4 2019 Q3 2019 Q4 2018 Change (YOY)
Revenue $34.6 billion $36.1 billion $40.3 billion (14.1%)
Net income (loss) ($6.6 billion) $2.6 billion $3.7 billion N/A
Earnings (loss) per share (diluted) ($3.51) $1.36 $1.95 N/A

Data source: Chevron earnings releases. YOY = Year over year.

Let's not sugarcoat this: It was Chevron's largest-ever quarterly loss. The reason the market hasn't reacted more strongly is that the company projected the bad news in December, when it announced that it was reallocating capital away from lower-margin projects toward projects from which it expected higher rates of return. Most of these were related to natural gas, in particular the company's Appalachian shale assets. At the time, it projected resulting impairment charges of $10 billion to $11 billion. Appalachian shale assets made up $6.5 billion of the final result of $10.4 billion.

It's worth noting that, absent the impairment charge and a $1.2 billion asset sale, the company would have posted a $2.6 billion profit, the same as it posted in Q3 2019. Chevron hasn't announced its plans for these assets yet, but selling them is on the table, which means that it could see some residual benefit in a future quarter.

Aside from steadily increasing earnings in the small U.S. downstream segment, Chevron had a rough quarter across the board:

A bar chart showing Chevron's earnings by segment

Note: The leftmost green bar would actually extend much further downward, with a value of ($7,465). Other bars are to scale. Data source: Chevron earnings releases. Chart by author.

What else happened in the quarter

  • Overall production was essentially flat year over year, at 3.1 million barrels of oil equivalent per day (BOE/d), with increases in U.S. oil and gas production offsetting declines in international production. Although a very small part of the company's overall production, U.S. natural gas liquids showed the highest production growth, up 39.9% to 284,000 Boe/d. That's good for Chevron, as natural gas liquids command a higher price than dry natural gas (that is, gas in a gaseous state).
  • The company continued to pay down debt and ended 2019 with $27 billion in debt on its balance sheet, for a debt ratio of 16%. Total debt has fallen by 21.7% since the end of 2018.
  • Chevron acquired an additional 15% working interest in the El Trapial field in Argentina. It also acquired Australian fuel retailer Puma Energy, for $288 million. It announced deals to sell its stake in Azerbaijan's Azeri field for $1.6 billion to Hungarian company MOL, and to completely divest its Colombian natural gas assets to a subsidiary of Colombian state-run energy company Ecopetrol.
  • The company increased its quarterly dividend by $0.10 per share (8.4%) for Q1 2020, to $1.29/share. At current prices, that yields about 4.5%

What management had to say

When earnings are bad, you can expect a big oil CEO to focus on cash flow, and that's just what Chevron's CEO Michael Wirth did in a statement:

Cash flow from operations remained strong in 2019, allowing the company to deliver on all our financial priorities. We paid $9 billion in dividends, repurchased $4 billion of shares, funded our capital program and successfully captured several inorganic investment opportunities, all while reducing debt by more than $7 billion. Earlier this week, we announced a quarterly dividend increase of $0.10 per share, reinforcing our commitment to growing shareholder returns. ... For the first time in the company's history, annual production exceeded 3 million barrels per day of oil equivalent.

Better luck next time

With oil prices down sharply so far in 2020, thanks to global oversupply and concerns about how the emerging coronavirus outbreak might affect the world economy, the near-term outlook isn't great for most oil companies. However, Chevron may be the rare oil company for which Q1 2020's earnings are almost certain to outperform Q4 2019's (though given its Q4 results, that's not saying very much). 

We're likely to see continued near-term volatility in the sector as a number of factors play out on the global stage. But Chevron -- even when posting its largest quarterly loss in history -- has proven that it's perfectly capable of churning out plenty of cash and covering its dividend. While investors may not want to buy in just yet, given the current market environment, Chevron is certainly a company for dividend investors to keep on their watch lists. 

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