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Why Chevron didn’t sink in 3Q14

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Updated

Integrated stocks are a safer bet

Oil prices have been on a rapid decline in the past couple of months. Since the high of $107 per barrel in June, oil prices dropped ~27%. Currently, they’re trading close to $78 per barrel.

Surging supply isn’t being met by an equivalent. This is a result of dull demand levels.

Chevron’s (CVX) average sales price per barrel of crude oil and natural gas liquids in the U.S. was $87 in 3Q14. It was down from $97 in 3Q14.

Internationally, average sale prices were $93. They were down from $104 last year.

Oil prices impact the profit margins of oil producing companies, as long as they’re pure-play upstream companies—like Occidental Petroleum (OXY) and Anadarko Petroleum (APC).

However, integrated oil companies—like Chevron and ExxonMobil (XOM)—that also engage in downstream activities, enjoy the benefits of falling oil prices.

CVX, OXY, APC, and XOM are all part of the Energy Select Sector SPDR ETF (XLE).

 CVX’s lifeboat

When crude oil prices fall, downstream companies or refiners enjoy a unique advantage. A fall in West Texas Intermediate (or WTI) prices causes the spread between the U.S. benchmark to contract against Brent. Brent is the international benchmark.

When this happens, refiners enjoy higher refiner margins. They buy their crude inputs at a cheaper price. They sell the refined products at relatively higher prices. This is what happened with Chevron this quarter.

The company confirmed in its press release that higher earnings in the Downstream segment were driven by lower feedstock costs.

Refinery inputs this quarter were 921,000 barrels per day (or bpd)—90,000 bpd higher year-over-year (or YoY).

Upstream outlook

Despite falling prices, the company is engaging in several growth projects.

Over the long term, Chevron is planning major expansion projects. Management expects the projects will grow production to 3.1 million barrels of oil equivalent per day (or MMboe/d) by 2017.

In the next part of the series, we’ll discuss Chevron’s major projects.

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