It was hardly a secret that this earnings season would be an ugly one for Big Oil. It was virtually inevitable that Chevron Corporation (NYSE:CVX) was going to suffer a steep drop in year-over-year profits. That's what a roughly 50% decline in oil prices will do to one of the biggest oil companies on the planet.
Even in the midst of a horrible operating climate, Chevron still turned a profit last quarter, but the big question moving forward is when oil prices will rise once again. As a commodity business, Chevron is more or less reliant on supportive oil prices to grow. Of course, that question is impossible to answer with absolute certainty, which means investors buying in today need to be comfortable with the prospect that oil prices might stay low for a while.
Here's a rundown of Chevron's quarter.
Battening down the hatches
When the price of oil collapses, there's little Big Oil can do other than cut costs and sell assets, to raise as much cash as possible. This approach helps companies continue to fund operations, pay dividends, and generally keep investors from bailing.
Sure enough, Chevron has significantly cut expenses to stay afloat. Last quarter alone, the company sold off $3.6 billion in various downstream assets. In addition, Chevron said it won't buy back any of its own stock this year, which should save another $5 billion. Last but not least, Chevron cut capital spending by $800 million last quarter.
However, even with these measures in place, Chevron still suffered greatly at the hands of the oil-price collapse. In all, first-quarter profit fell 43% year over year, to $2.5 billion. Chevron's upstream unit, which houses its traditional oil and gas exploration and production, saw profit decline by 63%.
Chevron's U.S. upstream division posted a $460 million loss last quarter, reversing a $912 million profit in the same quarter the year before. That's because Chevron's average realized oil and gas price fell to $43 per barrel last quarter, from $91 per barrel in the first quarter of 2014.
A low bar to clear
Yet things weren't as bad as they could have been. Since Chevron is an integrated major, its downstream refining business helped out. When oil prices collapse, refining profits tend to rise, because those falling oil prices mean lower refining feedstock costs. Refining margins, in turn, get a boost.
That's how Chevron managed to beat estimates, earning $1.37 in diluted earnings per share for the first quarter versus analyst expectations of $0.79. Chevron's downstream profits nearly doubled year over year.
Of course, what matters most to Chevron, and all of Big Oil for that matter, is when oil prices will climb once again. Predictions are impossible, but oil has shown measurable signs of life recently. West Texas Intermediate is back to $60 per barrel, from the $45 low of a few months ago.
In the meantime, without higher oil prices, investors will need to curb their enthusiasm. Chevron failed to increase its dividend on schedule, entirely as a result of the oil crash. It's been one full year since Chevron last raised its dividend, meaning the company was due for a dividend bump. As a dividend aristocrat with 27 years of consecutive dividend increases under its belt, Chevron disappointed with its flat dividend, especially considering Chevron's fiercest competitor, ExxonMobil Corporation, managed to increase its payout by 6% after releasing its own first-quarter earnings.
Chevron could still increase its dividend within the next three quarters to retain its status as a dividend aristocrat. But a higher payout for a company that already yields nearly 4%, during a brutal operating environment, would be a severe strain on Chevron's financial position.
Clearly, the best cure for what ails Chevron is higher oil prices. When that will happen is anyone's guess.