The knee-jerk reaction to falling oil prices is that all oil companies like Chevron (NYSE:CVX) will struggle, so some analysts and investors might have been surprised when Chevron's latest earnings improved on last year's quarterly results and even beat analyst expectations. Let's look at how Chevron's earnings might have caught a few people off guard, along with the one thing people should focus on over the long term when it comes to investing in this oil enterprise. 

Oh yeah, that's why they're integrated
When oil prices are high, we tend to forget that integrated oil companies like Chevron actually have refining and marketing assets, because their contribution to earnings is small compared to the upstream side of the business that actually produces oil. Over the last couple years, Chevron has made more than 90% of its earnings from the production of oil and gas.

This past quarter, though, demonstrated why integrated oil companies work on both sides of the business. Earnings from oil and gas production fell more than $400 million year over year; however, earnings from downstream refining, chemical manufacturing, and retail more than made up for that by increasing earnings by over $1 billion, to $1.39 billion, almost 25% of total quarterly profit.

This is one aspect that makes integrated majors so unique. In theory, these two business segments work against each other: When oil and gas prices are high, the production side of the business booms while refining and chemical manufacturing suffer because their feedstock costs are high. As prices drop, though, the losses from production can be recaptured by those downstream segments. Overall, this means integrated majors might not see huge jumps in profit when oil and gas prices are high, but they are much more protected than one-trick-pony producers when prices are low.

Cash strapped
The one weak point in Chevron's earnings release is that the company has not converted its revenue into free cash flow as effectively as many of its peers. This past quarter, BP, Royal Dutch Shell, and ExxonMobil were more than able to cover their capital expenditures, dividends, and share repurchases from cash generated from continuing operations. This wasn't the case for Chevron. To meet its dividend obligation and buy back stock, the company relied on debt issuance and a few asset sales to cover the difference.

Source: Chevron Earnings Release.

The one positive here is that the company made more in cash flow than it spent on capital expenditures, which it had not done since 2012. Hopefully, once the company brings its major capital projects online in the next couple years, Chevron's cash situation will change dramatically.

What a Fool believes
Whenever I look at Chevron's earnings releases, my grandmother's voice keeps popping into my head with the phrase "patience is a virtue." Chevron has fallen behind the rest of Big Oil when it comes to reining in capital spending and focusing on free cash flow generation, and that will remain the case as long as its Gorgon and Wheatstone LNG projects are under construction and not contributing to cash flow an earnings. These two projects are the linchpin of the company's success over the next couple years, and investors will need to heed that grandmotherly advice before making any major decisions about buying Chevron stock.