You don't have to do too much research to figure out what Chevron's (NYSE:CVX) earnings will likely look like this upcoming quarter. Chances are they will look a lot like they did 3 months ago, especially considering the average price for a barrel of oil over the last quarter wasn't a heck of a lot better than it was the quarter before.
From an investor's standpoint, you can't expect much to change for Chevron on a quarterly basis when it is so closely tied to commodity prices. However, there are some items worth checking in with to get a feel for the long term health of the company. So instead of fretting over the quarterly numbers, here's what you should focus on.
Execution of cost cutting measures
A lot of blame has been targeted at Chevron and other integrated majors for the excessive spending over the past several years, but they are not entirely to blame here. Sure, you could nitpick that Chevron might have taken on one too many projects several years ago and is stuck with a bunch of development projects today. But that ignores the fact that companies like Chevron need to invest through both the ups and downs of the market.
One thing you can't blame Chevron for, though, is the high prices it has been forced to pay oil services companies. As Christophe DeMargerie -- the recently deceased CEO of Total -- put it, Big Oil was the "deep pocket" for oil services companies. Now that oil prices have nearly halved and producers are cutting back spending, the ball is back in the producers' court in terms of pricing. So far this year, Chevron has cut close to $900 million from its operational budget through agreed reductions with its service contractors, and it's targeting cutting spending in its operational segments by 10-30%.
Since there isn't much the company can do to increase revenue today -- sorry, there's no such thing as luxury brand crude oil -- cost cutting is one of the few ways that it can increase operational profits. Investors should look to see how much Chevron has been able to cut from its operational budget without compromising its base production, because trimming the fat could lead to a pleasant surprise in future earnings.
Smooth sailing with Gorgon & Wheatstone LNG
This has been a long, long time coming, but within the next 18 months, both its Gorgon and Wheatstone LNG facilities are finally set to start operations. Gorgon is a project that has taken decades to develop -- the first gas discoveries were back in the mid 1990s, and it has been a major capital expenditure for Chevron since 2009. Chevron has been investing heavily in the Wheatstone facility for almost as long.
The start-up of these facilities will represent a major change for the company. Based on Chevron's equity ownership in the two projects, the company has about $42 billion in capital -- close to one-quarter of its total market capitalization -- tied up in two projects that are not-yet-producing assets. Once it does bring those facilities online, it should significantly boost returns on capital.
Investors have given the company a lot of heat for the cost overruns on these facilities, and any further hiccups will discourage even further. So look to see if there are any significant updates regarding the scheduling of the first LNG cargoes from Gorgon, or a construction update on Wheastone, because these are likely to be big catalysts for lifting Chevron's stock out of this funk.
What a Fool believes
For those invested in Chevron right now, the next few earnings reports are probably going to be a major test of your patience. A lot will be said about how the company's paying dividends with debt is a major concern, along with its lack of cash generation. Obviously the company can't continue to do these sorts of things in perpetuity; ideally, once major capital projects like Gorgon and Wheatstone come online they will boost cash flow and allow the company to reduce spending.
In the meantime, the best thing that the company can do is reduce its operating costs and remain focused on getting these major capital projects up and running. So if you are invested in Chevron, or tempted to buy into that 4.5% yield, you should look to see of the company is making those two things happen.