In a volatile market, things can change incredibly quickly.
Take, for example, the second-quarter earnings of Chevron (NYSE:CVX). Just three months ago, the oil and gas supermajor stunned Wall Street by reporting a $3.6 billion profit, while its giant peers ExxonMobil, Royal Dutch Shell, and BP all reported net losses. This time around, Chevron reported a massive $8.3 billion net loss.
Don't let that rapid shift fool you. There's still a lot to like about Chevron. Here's what investors need to know about its latest results.
Chevron by the numbers
|Metric||Q2 2020||Q1 2020||Q2 2019||Change (YOY)|
|Revenue||$15.9 billion||$29.7 billion||$36.3 billion||(56.2%)|
|Net Income (Loss)||($8.3 billion)||$3.6 billion||$4.3 billion||N/A|
|Liquids Production*||1.82 million BOE/d||1.97 million BOE/d||1.86 million BOE/d||(2.2%)|
|Total Debt||$34.1 billion||$32.4 billion||$30.6 billion||11.2%|
That net loss is bad, but it was actually one of the better performances among the oil supermajors: BP posted a $16.9 billion net loss for the quarter, while Shell's net loss was $18.1 billion. Only ExxonMobil's net loss was smaller, at $1.1 billion.
Chevron's debt load may not seem to have increased by much over the past year, but that's a bit misleading. The company paid down more than $3 billion of debt in late 2019, ending the year with $27 billion of debt on its balance sheet. In the first half of 2020, that number ballooned by 26% to $34.1 billion.
What happened during the quarter
"Second quarter was a challenging one for the company," said CFO Pierre Breber on the earnings call. That's putting it mildly. The $8.3 billion loss was Chevron's largest since it merged with Texaco in 2001.
Most investors already know the story here: First, near the beginning of the year, concerns about an oversupply of crude began pushing oil prices downward. Then, an oil price war between Saudi Arabia and Russia broke out in early March, sending oil prices tumbling. That dovetailed with a drop-off in demand as the COVID-19 pandemic accelerated. Oil prices remained low into the second quarter, when a new OPEC+ agreement among producers to curtail crude output was signed. Fuel demand is still weak, though, due to the ongoing effects of the pandemic. Chevron's 20% capital spending cut hasn't been enough to offset that lack of demand.
The only other major news from the quarter was Chevron's agreement to buy oil and gas producer Noble Energy for $13 billion ($5 billion in stock, and the assumption of Noble's $8 billion of debt). The move gives Chevron the Permian Basin exposure it was seeking when it tried to acquire Anadarko Petroleum in 2019. It lost the bidding war for Anadarko to Occidental Petroleum, which paid $55 billion in cash and debt for it. Chevron walked away with a $1 billion breakup fee, and now gets Noble's Permian acreage -- which is about 40% the size of Anadarko's -- for less than one-quarter of the price (including debt) that Occidental paid.
What management had to say
"The past few months have presented unique challenges," said Chevron CEO Michael K. Wirth in a press release, echoing Breber's take. "We're focused on what we can control," he continued. "Our actions are guided by our values and our long-standing financial priorities: to protect the dividend, invest for long term value and maintain a strong balance sheet."
Chevron certainly seems to be doing its best to balance those priorities. By using stock to acquire Noble, it preserved cash for its dividend. However, the company couldn't avoid taking on debt to meet its obligations. Luckily, it had paid down debt in 2019, so the net impact on the balance sheet was minimal.
On the earnings call, Breber called sustaining and growing the dividend the company's "first" priority. He also pointed out that Chevron is doing comparatively well: "I guess I just would first step back and just say we're in a different place than almost everyone else in our industry. We have one of the strongest balance sheets."
Breber isn't wrong: Chevron's debt-to-EBITDA ratio is much lower than those of its peers:
Ultimately, there's little that Chevron -- or any oil company -- can do to stop the bleeding right now. Just like in the oil price downturn of 2014 to 2017, all the company can do is wait and hope that crude oil prices and demand recover quickly. This time around, though, Chevron's natural gas and refined product sales have also fallen. Moreover, it doesn't have a trading business. That leaves it without any easy ways to offset its upstream troubles.
That said, Chevron's opportunistic purchase of Noble Energy on the cheap, using stock instead of cash, was strategically smart. The company's balance sheet is stronger than those of its supermajor peers. While there's too much uncertainty in the oil industry right now to call Chevron a buy, it seems to be doing better than its poor Q2 results would suggest.