Sheila McNulty Chevron’s bad news is not dimming hopes for future

Chevron’s interim update, at first glance, is bad news. Earnings for the fourth quarter 2009 are expected to be lower than in the third quarter of 2009. When broken down by segment, downstream – refining and marketing – results, are expected to be sharply lower, due mainly to significantly weaker refining margins, which are affecting the industry as a whole. Upstream – exploration and production – results are expected to be in line with third quarter results, as the benefit of higher commodity prices is offset by the absence of gains recognized in the third quarter associated with formal approval of the Gorgan liquefied natural gas project in Australia.

But a closer look at Chevron’s upstream results by Credit Suisse reveals all is not lost. Credit Suisse expects Chevron to deliver over 9 per cent year-on-year growth in the fourth quarter of 2009, which is almost unprecedented for a supermajor. Here is more from the report:

Convincing evidence has now emerged of the scale of the Chevron operational and financial turnaround story, with 2009 volumes moving some 7 per cent above the 2008 base, and with increasing earnings leverage behind generated from this growth, thanks to the oil bias of current growth.

So even as analysts continue to lower their earnings forecasts for the majors ahead of their results at the end of the month, they are looking into 2010 for good news from Chevron. In the fourth quarter, Chevron says, production rose in the Gulf of Mexico; from the continued ramp-up of production from the expansion project at its Tengiz field in Kazakhstan; and and higher sales in Thailand. Formal approval of the Gorgon liquefied natural gas project, Gorgon, in Australia, also contributed to growth. These production gains should continue.

But whether Chevron’s actual results see a major rise depends on how commodities do. According to Fitch Ratings’ 2010 outlook for the global oil & gas sector, the oil & gas industry is stable as the rally in crude oil prices from the lows experienced during the first quarter of 2009 continue to provide considerable support to industry activity levels and financial profiles. It does note, however, that the key risk for upstream companies and integrateds in 2010 relates to the potential for weaker oil prices during the year. No matter how much production Chevron, or anyone else, has, if they are not getting a good price for it, investors will not be happy.