Chevron Profit Down on Reduced Output, Weak Refining

03.11.2012 -

Chevron posted earnings on Friday that were much lower than expected as maintenance exacerbated a decline this year in oil and natural gas production, and shares of the second-largest U.S. oil company slid 2.5%.

Third-quarter production fell to 2.52 million barrels of oil equivalent per day from 2.60 million bpd a year earlier. With a fourth-quarter bounce expected, Chevron expected 2012 production to average about 2.6 million bpd, or 97% of its original 2.68 million bpd target.

Increasing output from the wellhead is a struggle for many big oil companies, including Exxon Mobil and Royal Dutch Shell. With oil and gas assets tightly controlled by the countries where they are located, the majors are left to drill in pricier areas on land and offshore.

Smaller U.S. oil company Hess, on the other hand, delivered on Friday a strong increase in profits and production owning to its interest in the Bakken oil basin in North Dakota, and a resurgent Libya operation.

For Chevron, the third quarter was marred by a huge fire at its Richmond refinery in California that damaged the crude unit there and now expected to be repaired in the first quarter. However, the company said this had a limited impact on third-quarter earnings, which were hit hard by weak marketing margins.

Overall, third-quarter net income fell to $5.25 billion, or $2.69 per share, from $7.83 billion, or $3.92 per share, a year earlier. Earnings dropped 17% to $5.1 billion in the oil and gas production business and plunged 65% to $689 million in the refining, or downstream, operation.

"Downstream was the primary culprit behind the miss," Simmons & Co analysts said in a note to investors.

The reported profit included about $600 million from an asset sale gain, offset by a negative foreign exchange impact, they said. Leaving out certain items, Chevron earned $2.55 per share, compared with the analysts' average estimate of $2.83, according to Thomson Reuters I/B/E/S.

Chief Executive Officer John Watson said that, apart from heavy planned oilfield maintenance, pricing for its output was also weaker. This was in part because of the oversupplied U.S. market for natural gas liquids, while the average Brent oil price of $110 per barrel was down $2 from a year before.

A storm cut into Gulf of Mexico production, while planned maintenance in Kazakhstan and the United Kingdom caused the majority of the production decline outside the United States, according to Chevron.

Downstream bright spot was that Chevron's smaller North American refineries in British Columbia and Salt Lake City were running discounted crude piped in from the Bakken, said Mike Wirth, executive vice president for downstream and chemicals.

A large spread between U.S. oil prices and international benchmark Brent has emerged due to the combination of a surge in North American oil production along with subdued U.S. demand and the limited ability to ship it out to international markets.

"On this crude disconnect, it is like real estate," Wirth told analysts on a conference call. "It is location, location, location, and our large coastal refineries are distant from where these advantages really are."

More broadly, Wirth said he was pessimistic about near-term demand for refined products based on the sales figures he saw in Asia and elsewhere.