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Exxon, Chevron shares struggle to regain ground after disappointing earnings

Taking a hit after posting some unimpressive sector results for the fourth quarter of 2017, oil and natural gas majors Exxon Mobil Corp. and Chevron Corp. stock prices are struggling to regain ground.

Shares of both companies were sent careening lower in early February after the two reported adjusted fourth-quarter 2017 earnings that, among other things, fell short of analysts' expectations.

On Feb. 2, Chevron stock tumbled $6.99, or about 5.6%, on the day on the New York Stock Exchange to close at $118.58 per share. Shares tried to recover shortly thereafter but were valued at $110.98 per share on Feb. 20, losing an additional $7.60, or 6.4%, since Feb. 2.

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While a recovery in oil prices and disciplined spending has worked to improve the company's financials in the last year, a key part of Chevron's strength lies in production growth, particularly in the Permian Basin in the U.S.

"Chevron's earnings and cash flow badly missed both our and consensus expectations for the second consecutive quarter due to higher corporate charges and weak downstream results. We do expect that the issues affecting the downstream (hurricane effects, nose-diving West Coast margins) are transitory and not structural," Jason Gammel, equity analyst with Jefferies, wrote in a research note to clients. "The corporate charges are however ongoing due to lower capitalized interest and tax offsets. We have lowered our 2018 EPS estimate by 12%, about 2/3 of which is due to the higher corporate charge. The remainder is due to lower production due to asset sales and a slower assumption of the ramp in LNG volumes."

Chevron is banking on rising output and lucrative returns from its investments in the Permian Basin. During the fourth quarter of 2017, Chevron's production in the Permian was approximately 205,000 barrels per day, up 60,000 bbl/d from the same period in 2016. The company said full-year 2017 production from the region averaged 181,000 bbl/d, up 35% over the prior year.

"We are currently operating 16 rigs in the basin and plan to end this year with 20 company-operated rigs," Chevron CEO John Watson said during the company's recent fourth-quarter 2017 earnings call.

Although recent U.S. tax reform helped drive Exxon Mobil Corp.'s fourth-quarter 2017 earnings 400% higher on the period to $8.4 billion, the company's shares took a nosedive Feb. 2 after its reported production volumes and cash flow figures during the fourth-quarter 2017 largely disappointed analysts.

On Feb. 2, Exxon stock share prices on the NYSE tumbled $4.54, or about 5.1%, on the day to $84.53 per share. As of Feb. 20, Exxon's shares were valued at $75.75 per share, down another $8.78, or 10.4% from the Feb. 2 close.

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As its global downstream and chemical units struggled during the final quarter of 2017, after adjustments, Exxon's fourth-quarter 2017 earnings were $3.7 billion, or 88 cents per share, 2% below the same quarterly period in 2016 and well below analysts' estimates. The S&P Capital IQ consensus normalized earnings estimate for Exxon was $1.03 per share.

After the company's results were issued, Jefferies lowered its price target for Exxon from $90 to $87. "In addition to commodity price risk, we view the production downside as the key negative risk to [Exxon] given a lack of major project [final investment decisions]," Gammel said in a separate research note to clients.

In terms of its production growth in the years ahead, Exxon intends to triple its oil and natural gas output from the Permian Basin to more than 600,000 barrels of oil equivalent per day by 2025. The expansion is part of a larger plan announced at the end of January by Exxon Chairman and CEO Darren Woods, who said the company would invest more than $50 billion in its U.S. assets over five years in light of the tax reform in the U.S.

Exxon has already invested billions of dollars into the development of assets in the Permian Basin. In early 2017, Exxon spent more than $6 billion to more than double its Permian potential by acquiring privately owned companies with an estimated resource of 3.4 billion barrels of oil equivalent in the Delaware Basin.