How Much Could Chevron Corporation Earnings Drop Tomorrow?

Chevron (CVX 0.44%) will release its quarterly report on Friday, and investors are bracing themselves for a fairly steep decline in earnings from year-ago levels. Weak energy prices are largely to blame, but concerns about the company's production levels are also making investors question whether Chevron and fellow oil giant ExxonMobil (NYSE: XOM) can stay competitive with smaller, more nimble energy players ConocoPhillips (COP -0.43%) and Occidental Petroleum (OXY -0.09%).

Chevron has -- for now -- chosen to retain its integrated oil model, avoiding the course that ConocoPhillips and other players in the oil industry followed in spinning off downstream refining and marketing operations from upstream exploration and production activity. The big challenge for Chevron, though, has been using that model to generate growth, especially given the difficulties in keeping production levels high amid the natural decline of its existing wells. Can Chevron beat ExxonMobil, ConocoPhillips, and Occidental Petroleum in finding the most lucrative opportunities? Let's take an early look at what's been happening with Chevron over the past quarter and what we're likely to see in its report.

Chevron's Gorgon LNG project in Australia. Source: Chevron.

Stats on Chevron

Source: Yahoo! Finance.

Can Chevron earnings hold up this quarter?
In recent months, analysts have gotten a lot less enthusiastic about Chevron earnings, cutting their fourth-quarter estimates by $0.45 per share and their full-year 2014 projections by more than 4%. The stock has fallen about 3% since late October.

We've already gotten a reading from Chevron on how the fourth quarter could look, with the oil giant warning earlier this month that liquids production had fallen 4% from year-ago levels, offsetting slight gains in refining volumes. Given lower oil prices, those production losses will likely translate into an even sharper drop in overall profits, and Chevron has less refining capacity than ExxonMobil, making it less able to offset the resulting negative impact with benefits from cheaper input costs on the refining side of the business. Chevron's expectations are similar to what investors saw in the third quarter, in which the company suffered declining earnings but modestly rising revenue. Yet last quarter, Chevron actually saw production levels improve markedly, with total production rising 2.7% on strength both domestically and overseas.

Despite its status as an integrated major oil company, Chevron still gets the lion's share of its earnings from exploration and production. At 95%, the company even outpaces ExxonMobil and Occidental Petroleum in its dependence on E&P for profitability, making it closely resemble ConocoPhillips and its 100% E&P focus. Supporting those earnings over the long haul has been its favorable mix of oil and other liquids compared to natural gas, with Chevron getting two-thirds of its production from the more lucrative liquids side of the business. That's not quite as favorable as Occidental, but it gives Chevron a big advantage over Exxon, whose mix is closer to 50/50.

One concern for investors is whether Chevron can sustain its growth trajectory. The company said last month that it would cut its capital spending budget for 2014 by about $2 billion, although last year's spending included $4 billion in unplanned acquisitions. Still, with 90% of that budget likely going toward upstream asset acquisitions and production projects, Chevron hopes to get overall oil and gas production levels moving back in the right direction.

In addition, a key issue going forward is how Chevron can make maximum use of its natural gas assets. The company is betting huge on large liquefied natural gas projects in Australia, where massive nat-gas finds could provide much of Asia with low-cost energy. Yet Chevron isn't neglecting oil either, with major projects in the Gulf of Mexico and elsewhere potentially adding to exploitable reserves in the coming years.

In the Chevron earnings report, watch to see if the company's guidance is more optimistic than what ExxonMobil reported earlier today. With Exxon having disappointed investors with its report, Chevron needs to keep demonstrating its ability to compete more effectively if it wants to avoid the same fate as its larger counterpart.

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