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Chevron shares recover as announced buyback program counters Q2 earnings miss

After initially falling like Exxon Mobil Corp., Chevron Corp.'s stock shares recovered in afternoon trading July 27, as news the California-based oil and natural gas major will launch a $3 billion buyback program offset a miss in its second-quarter earnings.

At 1:15 p.m. ET, the company's stock on the New York Stock Exchange was priced at $125.63 per share, up $1.68, or 1.4%.

Although Chevron reported second-quarter GAAP earnings were softer than the market had expected at $3.4 billion, or $1.78 per diluted share, coming in well short of the S&P Capital IQ consensus estimate of $4.0 billion, or $2.08 per diluted share, the company's cash flow from operations for the first six months improved to $11.9 billion. This was up almost 37% from $8.7 billion in the corresponding 2017 period.

The stronger cash flow, combined with disciplined spending and higher upstream volumes and margins, will pave the way for the company to buy back shares.

"This enables us to initiate share repurchases, which are expected to be $3 billion per year based on our current outlook,” Chevron C hairman and CEO Michael Wirth said in a July 27 earnings release.

In March, executives announced plans to expand Chevron's upstream fleet, ramp production in the Permian and continue to improve cash flow and potentially restart its share buyback program. The company had not repurchased shares in several years since around the time that global crude prices began to crumble. Buying back existing stock generally makes the remaining shares more valuable.

Chevron is following the lead of peers like Royal Dutch Shell PLC who said July 26 that it had launched its long-awaited $25 billion share buyback program through 2020. Total SA reported the same day that it is in the process of buying back up to $5 billion in shares through 2020 to offset the end of its scrip program.

As Chevron's cash flow grew, the company also kept a lid on expenditures. Its cash capital and exploratory expenditures in the second quarter were $6.2 billion year to date, in line with the yearly budget.

During the second quarter, the major's total net U.S. production was 739,000 barrels of oil equivalent per day, up 38,000 boe/d from a year earlier.

And Chevron continues to bet on ongoing increased production and rising returns from its Permian Basin investments as key.

"Permian shale and tight production in the second quarter was 270,000 boe/d, representing an increase of about 92,000 [boe/d], up 50% relative to the same quarter last year. Our development strategy continues to center around disciplined execution and capital efficiency. We're currently running 19 rigs, and our development program is progressing as planned," James Johnson, Chevron's executive vice president for upstream operations, noted during the company's July 27 earnings call.

"Since 2016, we've increased our average lateral length per well in the Permian by approximately 35%. We'll continue to look for opportunities to core up acreage and improve the capital efficiency of our Permian program," Johnson added.