Oil major Chevron (CVX 2.19%) recently reported its financial results for the first quarter of 2014. While rivals ExxonMobil (XOM 1.38%) and ConocoPhillips (COP 0.77%) reported better-than-expected results for the first quarter, Chevron's first-quarter earnings missed Street estimates. Meanwhile, the company backed its Brent crude oil price projection, which has been the basis for its forward cash flow and production projections. While Chevron's oil price projection is too bullish, recent data suggests that Brent crude oil prices could strengthen.

Chevron's backs oil price projection
At its analyst meeting in March, Chevron had said that it has modeled its projections based on a Brent crude oil price of $110 per barrel. The company's previous oil price projection was $79 per barrel. In fact, Chevron was not the only major oil and gas company to come up with a bullish projection. Rival ExxonMobil also modeled its projection based on an oil price of $109 per barrel. Brent crude prices are currently hovering around this level.

Earlier this month, following the release of its first-quarter results, Chevron said that it received a number of questions related to its $110 per barrel Brent crude oil price projection. Patricia Yarrington, CFO of Chevron noted that that the $110 per barrel is not an internal price forecast, but simply the actual average Brent price over the 2011 to 2013 time period. Yarrington further said that at this historical three-year average Brent price of $110 per barrel, the company's cash margin is expected to increase to over $40 per barrel later this decade. According to Yarrington, a combination of strong volume growth and an accretive cash margin are expected to drive substantial growth in the company's cash flow from operations over the next several years.

Shareholders will be watching that closely. Oil majors such as Chevron and ExxonMobil have been increasing their capital spending to boost production. However, production at oil majors has in fact been declining. In the first quarter of 2014, Chevron's production dropped 2% to 2.59 million barrels of oil equivalent per day. Rising capital spending and falling production has meant that major oil companies' net debt has increased in recent years. The likes of Chevron and ExxonMobil have still remained committed to shareholder distribution. In fact, Chevron even raised its quarterly dividend to $1.07 per share recently. However, the increasing net debt could put pressure on Chevron's ability to reward shareholders. Therefore, it is important that the company sees significant growth in its cash flow from operations. The company believes that with Brent crude prices at $110 per barrel, it can achieve that. But is the company's oil price projection too bullish?

Chevron may have it right
Shortly after Chevron gave its oil price projection at an analyst meeting in March, I argued in another article that the outlook might be too bullish. This was because of anticipated growth in non-OPEC supply. The U.S. Energy Information Administration (EIA) had said in a report that growth in non-OPEC supply could exceed growth in world consumption. The EIA projected Brent crude oil prices to average $105 a barrel this year and $101 per barrel in 2015. However, Brent crude prices have remained at around $110 per barrel so far this year. Prices fell briefly to around $104 per barrel last month, but have since recovered and are trading around $110 per barrel.

More importantly for Chevron and other oil majors, Brent crude oil prices could remain robust. The International Energy Agency (IEA), in its monthly oil report, lowered its forecast for non-OPEC supply growth. At the same time, the Paris-based agency raised its global oil demand forecast for 2014 by 65,000 barrels per day to 92.8 million barrels per day.

The IEA lowered its forecast for non-OPEC supply growth by 100,000 barrels per day. The IEA further noted that OPEC output rose by 405,000 barrels per day to 29.9 million barrels per day in April, which helped in easing markets somewhat. However, the agency believes that the gain in OPEC output will not be enough to meet market needs in the second half of the year. Given this outlook, it is likely Brent crude prices could average $110 per barrel.

Indeed, Chevron's projections are likely to be accurate; however, the company could still remain under pressure due to its declining production.