Image Source: Chevron investor presentation.

Chevron (NYSE:CVX) surprised Wall Street quite a bit last week, when it announced earnings that were well above analyst expectations. Those surprising earnings and the announcement that it had made some big changes to its spending plans over the next couple of years was enough to get investors to cheer for a moment. However, every action has its consequences. Let's look at how Chevron did this past quarter, how it will help the company meet its financial goals over the next couple of years, and how it could possibly have detrimental impacts even further down the road. 

By the numbers
This past quarter, Chevron generated $2.03 billion in net income, or $1.09 per fully diluted share. That's a 63% drop compared with this time last year, but it was well above consensus estimates that expected $0.76 per share. Unlike last quarter, Chevron wasn't saddled with several billion in assets writedowns for its upstream segments. That situation helped to put overall upstream earnings barely in the black, with net upstream earnings of $59 million:

Source: Chevron earnings release, author's chart.

As you can imagine, the price of oil is the driving factor behind both the decrease in upstream production and downstream refining profits. When you compare the average realized prices for oil and gas, it really helps to bring those numbers into perspective

Price RealizationsQ3 2015Q3 2014
U.S. crude oil (price per barrel) $42 $87
U.S. natural gas (price per thousand cubic feet) $1.95 $3.46
International crude oil (price per barrel) $45 $93
International natural gas (price per thousand cubic feet) $4.68

$5.73

Source: Chevron earnings release.

The big picture: layoffs and spending cuts abound
A major goal that management has been set on achieving is to cover all spending obligations -- capex and dividends -- with cash from operations by 2017. Go back and look at any investor presentation, and you'll see it mentioned several times. Looking at the company's most recent results, this is going to be a daunting task. So far in 2014, cash generated from operations has been able to cover only 68% of the company's capital expenditures. Even when you add the more than $5 billion in asset sales, it's still well short of meeting all those spending obligations and has taken on a decent portion of debt to make up the difference. 

Source: Chevron investor presentation.

This is obviously an unsustainable situation. This quarter, though, the company made it abundantly clear that it was going to meet that goal come what may. As part of the press release related to its earnings, Chevron announced that it was increasing its total job cuts to 6,000-7,000, up from the 1,500 it had already announced earlier this year.

What's even more surprising is the amount it plans to cut from its capital expenditure budget over the next two years. By 2017-2018, the company anticipates that it will reduce capital spending by $11 billion to $15 billion compared with this year's expected budget. 

Source: Chevron investor presentation.

A large component of that spending reduction can be achieved once its Gorgon and Wheatstone LNG facilities come online. The combined spending on these two projects is around $8 billion annually and are both expected to be operational by 2016. Over the same time-frame, Chevorn expects to bring another 14 major capital projects online. This big swing in spending to cash generating assets should go a long way toward closing the funding gap. 

For investors worried that the company's current finances are a little strained and its dividend is looking a little shaky, this is great news. Looking longer term, though, after all of these major capital projects are brought online, the development pipeline for Chevron is noticeably smaller. If the company scales back spending over the 2017-2108 period as much as it says it will, it may be more difficult to grow production unless it has very, very high hopes for shale and tight oil in the U.S. and abroad.

What a Fool believes
In the short term, the moves Chevron is making will most certainly help improve profitability, while profits remain scarce across the oil and gas industry. At the same time, all of those major capital projects coming online between now and 2017 will probably lead to some big gains in earnings. Looking further down the road, one has to wonder whether the moves Chevron plans to make are a slight overreaction, and they could leave the company with a smaller development portfolio. There is still certainly some time before that becomes an issue, and a return to higher oil prices could change this equation very quickly. For the time being, though, it may be worth sitting back and watching how Chevron deals with bringing these major capital projects online over the next year before making any large investment decisions. 

Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com or on Twitter @TylerCroweFool.

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