Tuesday, July 25, 2023

Chevron's profit decline points to sector's new challenge: Lower oil prices



Chevron’s (CVX) preliminary second quarter results highlight what Wall Street had anticipated for the energy sector — a decline from record profits last year after a fall in the price of crude and natural gas.

Chevron said Monday that its Permian Basin production hit record levels, helping the oil major's quarterly profit come in at $3.08 per share, well above Wall Street expectations of $2.91. On a year-over-year comparison, earnings declined 47%.

“Not surprising that the year-to-year EPS comparison is weak, but then again, WTI prices were north of $120/b for part of Q2 ’22,” Stewart Glickman, energy equity analyst at CFRA Research, told Yahoo Finance in an email.

Oil and gas companies saw their profits skyrocket last year as crude prices rose following the Russian invasion of Ukraine. Production cuts from the world's largest oil producers and concerns about a slow recovery in China have put pressure on crude prices this year.

The average price of West Texas Intermediate (CL=F) came to $94.90 US dollars per barrel in 2022, 39% higher than the prior year. Currently, WTI is sitting above $78 per barrel.

Energy companies saw profits soar last year amid a series of spikes in the price of crude following the Russian invasion of Ukraine.  REUTERS/Liz Hampton
Energy companies saw profits soar last year amid a series of spikes in the price of crude following the Russian invasion of Ukraine. (REUTERS/Liz Hampton)

On Sunday Chevron announced it would waive its mandatory retirement age of 65 for CEO Mike Wirth, 62, and the company's CFO, Pierre Breber, will retire in 2024.

The company will report its full second quarter results on Friday when Exxon Mobil (XOM) is also slated to release its quarterly print.

Wall Street analysts estimate Exxon Mobil’s second quarter earnings per share will be $2.04, a 50% decline from the same period in 2022. Revenue is expected to show a 30% drop to $81.8 billion.

"The tone is likely to be one of uncertainty. While Chevron's numbers were a bit better than forecast, Exxon Mobil guided lower earlier this month and the consensus for Q2 has come down by about 10% since then,” Peter McNally, global sector lead for industrials, materials, and energy at Third Bridge, told Yahoo Finance.

Chevron Corporation (CVX)
NYSE - Delayed Quote (USD)
At close:4:03PM EDT
162.50-0.06 (-0.04%)
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Chevron says it returned $7.2 billion to shareholders in the second quarter in the form of dividends and stock buybacks. Returning cash to shareholders has been a recurring theme for years now — a trend which is expected to continue.

“Investors have gotten accustomed to a safer/slower-growth profile, and firms have been rewarded for engaging in it. I see no reason why this should change anytime soon,” said CFRA’s Glickman.

After a massive recovery since the onset of the pandemic and a spectacular performance in 2022, Wall Street equates the oil majors' balance sheets with low debt and surplus cash.

“We've seen this big one-year down move in the oil price, and yet the stock prices are not giving all that up because, frankly, [energy companies] have paid off their balance sheets,” Smead Capital Management CEO Cole Smead recently told Yahoo Finance Live.

Oil and gas-related stocks continue to lag the broader markets, with the Energy Select Sector SPDR Fund ETF (XLE) down 1.7% year-to-date. The losses are mild compared to the sector’s 2022 performance when XLE gained 57.6%.

Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.

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