Chevron Posts Strong Q1 Earnings of US$4.55 bil.

Upstream Doing Well

San Ramon (California)-based Chevron checked in on Friday (30 April) as the last of the international supermajors to post its first-quarter 2010 financial results. As expected, the second-largest U.S. oil company posted strong numbers, easily exceeding its comparable revenues and net profits from a brutal first quarter in 2009. Just as its industry rivals, Chevron also exceeded expectations with its January-March 2010 results, reporting net income of US$4.55 billion on revenue of US$46.74 billion. The company's net profits thus were nearly two-and-a-half times its first-quarter 2009 net profits of US$1.84 billion, while its revenues were up 33.6% year-on-year (y/y).

Higher oil prices in the first quarter certainly helped Chevron's profits and revenue surge upwards, but so did the company's solid upstream performance. Chevron produced 2.78 million barrels of oil equivalent per day (boe/d) in the first quarter, up 120,000 boe/d from the first quarter of 2009, an increase of 4.5% y/y. Chevron attributed the increased production primarily to expansion at several major international projects, including additional output from Tengiz in Kazakhstan, Agbami in Nigeria, and Tombua-Landana and Mafumeira Norte in Angola, but also from the launch of new projects in the United States, including first oil from the Perdido project in the Gulf of Mexico (GOM), following start-ups in GOM at Tahiti and Blind Faith in the recent past. Chevron's international upstream division produced 2.05 million boe/d in the first quarter, an increase of 3% y/y, while its domestic upstream segment produced 734,000 boe/d, up 9% y/y.

Downstream Not So Good

The picture was not so rosy for Chevron's downstream business, however. Weaker sales margins continued to hamper refiners, resulting in lower earnings, reduced refining rates, and lower petroleum product sales. Chevron said that its U.S. downstream business earned US$82 million in the first quarter, down from US$136 million in the January-March 2009 period, while international downstream earnings fell to US$114 million, a sharp drop from US$617 million in the same period in 2009, although this was due in part to asset sales in certain countries in Africa and Latin America since last year.

New Chevron chairman and chief executive John Watson said that the company is pushing forward with restructuring plans for its downstream business, given the continued weakness of sales margins for refined petroleum products. The company did not divulge further details, but additional asset sales and/or shutdowns of refineries (such as Chevron's Richmond, California facility) could be in the offing. Refinery crude input at Chevron's U.S. refineries declined 49,000 b/d to 889,000 b/d in the first quarter, compared to last year, due to weaker demand, while refinery crude input at the firm's international refineries was essentially flat y/y at 992,000 b/d. Chevron's refined product sales in the United States declined 54,000 b/d to 1.35 million b/d in the first quarter, while refined international product sales fell 12% y/y to 1.7 million b/d.

Outlook and Implications

Stronger than expected first-quarter financial results from the oil industry's supermajors suggest that higher oil prices are once again inflating the bottom lines of the big international oil companies, which were always expected to post better numbers than the dreadful first quarter of 2009 when oil prices completed their historic collapse. The oil companies' solid financial results also reflect the economic recovery under way in the United States and much of the world, although as "Big Oil" is all too aware, net profits that are seen to be too good often come with a price in the form of public criticism, regulatory scrutiny, and political grandstanding.

At the moment, however, the oil industry's biggest problem in the United States is not a public backlash over record profits or surging gasoline prices, but a public relations nightmare from the ongoing oil spill in the Gulf of Mexico from the Deepwater Horizon rig (see United States: 22 April 2010: Search Continues for Missing Workers Following Explosion on Transocean Rig in U.S. GOM and 23 April 2010: Transocean Rig Sinks Following Explosion, Tempering U.S. Offshore Drilling Optimism). The 20 April explosion on the rig, which caught fire and sunk two days later, is likely to have lasting political effects on the oil and gas industry, not only because of the unfolding ecological catastrophe as crude oil begins to wash up on the Gulf coast, but also due to the perception that is being created—in the minds of politicians and the public alike—that deepwater drilling is inherently unsafe.

Indeed, the inability of BP—which was leasing the rig from Transocean to drill in waters more than a mile deep some 42 miles offshore Louisiana—to stem the flow of oil still spilling out from the underwater well is sure to set back the industry's efforts to convince the U.S. government to open up more areas offshore to drilling. U.S. President Barack Obama, just weeks after announcing plans to do just that, has already stepped back from this position, saying that any future expansion of offshore drilling will likely be determined by the result of a federal investigation into the Deepwater Horizon tragedy (see United States: 26 April 2010: Crews Work to Contain Oil Spill from Sunken Rig in Gulf of Mexico and 3 May 2010: U.S. President Blames BP for Oil Spill amid Grim Outlook for Gulf Coast). The apparent failure of the "fail-safe" blowout preventer mechanism on the sunken rig is hardly going to reassure sceptical politicians that this incident was an exception, not the rule, particularly since the rig had just passed a safety inspection 10 days earlier. Nor will the public likely be willing to simply accept the industry's reassurances on precautionary measures to prevent oil spills from deepwater drilling, especially if the clean-up costs and economic consequences from the Gulf oil spill mount into the tens of billions of dollars.