A strong U.S. dollar and no impairments ensured profitable upstream operations for Chevron (NYSE:CVX) in the third quarter, a far cry from the embarrassing loss posted in the previous quarter. As a result, the San Ramon, California-based giant beat analyst estimates comfortably to post overall earnings of $1.09 per share.

Source: Chevron

Low energy prices depress earnings and future spending
Chevron reported net income of $2.0 billion, a 64% drop from last year's third quarter, on total revenue of $34.3 billion. Operating profit, too, fell 69%, to $2.8 billon, causing pre-tax operating margins to dive 809 basis points, to 8.1%.

Segment-wise, upstream operations -- or exploration and production-related activities -- crawled to a net profit of $59 million after posting a net loss of $2.2 billion in the second quarter. However, it was still a huge dive from the $4.6 billion posted during last year's third quarter. The downstream, or refining and marketing, segment recorded a comfortable 59% gain year on year, to $2.2 billion.

CEO John Watson said that, while low oil and gas prices depressed profitability, management was "focused on improving results by changing outcomes within our control." As a result, he expects 2016 capital and exploratory expenditures to be roughly 25% lower than this year's budget. And depending on business conditions, Watson expects even further spending cuts in 2017 and 2018. This also translates to a reduction in Chevron's total employee headcount by 6,000 to 7,000.

Additionally, Chevron has been successfully selling down assets, and has generated $11 billion in the last two years. Management expects to generate another $5 billion to $10 billion from additional sales by the end of 2017.

Upstream operations hang on to profits
Domestic, or United States, upstream earnings fell to a $603 million loss against a $929 million profit in the year-ago quarter. The culprit? A 52% plunge in liquids prices, and a 44% slide in natural gas prices from year-ago levels. However, production volumes increased 8%, to 730,000 barrels of oil equivalent, or BOE, per day, which is definitely heartening. Ramp-ups in the Gulf of Mexico, the Permian Basin, and in the Marcellus shale contributed to the production growth.

International operations generated a $662 million profit thanks to a strong U.S. dollar that resulted in foreign exchange gains of $258 million. This is still an 82% fall from the year-ago quarter. Net production fell 4%, to 1.81 billion BOE per day. Normal field declines, production shut-ins in the Partitioned Zone in the Middle East, and maintenance downtime in Kazakhstan contributed to the decline.

Downstream operations continue to impress
Higher margins on sales of refined products increased U.S. downstream earnings by 54%, to $1.2 billion. Additionally, last year's third-quarter earnings of $809 million also include a gain from an asset sale. In other words, comparing only core operations, the gain is much higher than 54%. Refinery-crude input increased 2%, to 942,000 bpd. Total refined product sales grew by 2% thanks to higher branded gasoline sales.

Internationally, downstream operations earned $962 million, a 66% jump from year-ago numbers. Again, this includes a foreign exchange gain of $141 million. Removing the effects of the strong dollar, international refining and marketing grew a solid 47%. This is despite a 7% drop in refinery crude input, which clocked 777,000 bpd in the third quarter.

Cash flow from operations for the first nine months of 2015 came in at $14.9 billion -- a 40% drop from the corresponding period last year.

Foolish takeaway
Chevron's downstream segment wasn't enough to control the damage wrought on its upstream operations as market conditions turned sour. However, the results are much better than the previous quarter. Chevron's exposure to large, cash-guzzling upstream projects around the globe makes it more vulnerable to commodity prices than its big-oil peers. The company's refining arm isn't robust enough to reduce its earnings volatility.