Chevron (NYSE: CVX) recently reported its second-quarter results. The headline was that the oil giant produced a $6 billion profit, which was slightly above analysts’ expectations. However, that was nearly 50%, or $6 billion, below the year-ago level.
Here’s a closer look at what caused Chevron’s profits to plunge by almost $6 billion in the second quarter.
Drilling down into Chevron’s earnings
Chevron hauled in nearly $49 billion of revenue during the second quarter. Here’s a look at how that flowed through into its income statement:
As that graphic showcases, Chevron’s revenue tumbled nearly 29% compared to the year-ago period. Meanwhile, its net income declined by almost half, or around $6 billion, even though most of its expenses also fell. One notable factor caused the decline, which becomes evident as you drill down into the performance of its four operating segments.
Chevron’s U.S. upstream segment produced more than 1.2 million barrels of oil equivalent during the quarter. That was up 4% from the year-ago period due to record output from its Permian Basin operations. However, earnings from the segment plunged from nearly $3.4 billion in the year-ago period to $1.6 billion in this year’s second quarter. The culprit was lower pricing. Chevron’s realized price for liquids (oil and natural gas liquids) fell from $89 per barrel to $56 per barrel, while natural gas realizations declined from $6.22 per million cubic feet (MCF) to $1.23 per MCF.
Chevron experienced a similar impact from lower commodity prices in its international operations. While production grew by about 1%, earnings tumbled (from $5.2 billion to $3.3 billion). Chevron realized $68 per barrel of liquids sold (down from $102) while capturing $7.50 per MCF (compared to $9.23).
Lower pricing also affected Chevron’s downstream refining operations. Earnings in its U.S. and international downstream segments declined (from a combined $3.5 billion to $1.5 billion) even though product sales increased by nearly 8% globally. That’s due to lower margins for refined products sold during the period.
Overall, lower commodity prices cost the company over $6.4 billion in the period via lower upstream price realizations and refining margins:
A temporary setback?
Lower prices took a big bite out of Chevron’s profits during the second quarter. However, that headwind has started to fade over the past month. Oil prices have rallied by about $10 a barrel, pushing back above $80 per barrel.
Oil could keep rising. Several Wall Street banks forecast that oil will top $90 a barrel next year. For example, Goldman Sachs has a $93-a-barrel 12-month price target on Brent oil (about $10 above the recent price), while Bank of America sees $90 Brent oil early next year.
Fueling those forecasts is strong demand growth amid tighter supplies. Analysts at Goldman anticipated that global oil demand hit a record 102.8 million barrels per day (BPD) last month. That strong demand comes as OPEC is cutting its production. That leads the bank to forecast a 1.8 million BPD supply shortfall in the second half of this year, which should moderate to around 600,000 BPD in 2024. The supply gap will burn off global storage inventory levels, boosting prices.
Higher oil prices would be a boon to Chevron’s profits. Meanwhile, the oil giant is putting itself in an even better position to capitalize on higher prices by acquiring fellow oil and gas producer PDC Energy for $7.6 billion. Chevron expects the acquisition, which will close later this month, to be immediately accretive to its earnings per share and free cash flow. It projects that the deal will add $1 billion to its annual free cash flow, which assumes $70 Brent oil. With Brent recently above $80 (and potentially heading back above $90), the PDC Energy deal could provide an even more meaningful boost to Chevron’s earnings and free cash flow in the coming quarters.
Dual catalysts could fuel a rebound in Chevron’s profits
Chevron’s earnings cratered by $6 billion in the second quarter due entirely to the impact of lower commodity prices. However, that headwind could fade in the coming quarters. Crude prices have already rebounded by nearly $10 a barrel and could double that tally in the coming months. On top of that, Chevron took advantage of the decline to buy PDC Energy, putting it in an even better position to capitalize on a recovery in crude prices. Because of that, Chevron’s profits could bounce back big-time. That makes now a potentially great time to buy shares of the oil stock.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Matthew DiLallo has positions in Bank of America. The Motley Fool has positions in and recommends Bank of America and Goldman Sachs Group. The Motley Fool recommends Chevron. The Motley Fool has a disclosure policy.