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Exxon, Chevron could struggle to replicate prior-quarter success in Q4'18

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Essential Energy Insights - September 17, 2020

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Exxon, Chevron could struggle to replicate prior-quarter success in Q4'18

With global crude oil prices losing their footing at the end of 2018, U.S. integrated oil and natural gas majors Exxon Mobil Corp. and Chevron Corp. are expected to report a sequential drop in earnings for the final quarter of the year, even as production levels likely ticked higher over the three months.

The first nine months of 2018 proved to be volatile, as the companies saw output oscillate and oil prices vacillate. Financial figures for the last quarter of 2018, which will be released Feb. 1, should be more subdued but should still leave the companies on solid footing as the new year begins.

During the first six months of 2018, share prices at Exxon and Chevron spiraled lower, as adjusted earnings and cash flow figures for the first two quarters missed expectations and production numbers largely disappointed.

By the third quarter of 2018, though, Exxon's earnings rebounded to a four-year high as output, much of it from U.S. shale, increased. The major's third-quarter 2018 shale oil production rose 57% on the year due to the ramp-up to 38 rigs in the Midland and Delaware basins. Exxon's total output came in at 3.79 million barrels of oil equivalent per day in the third quarter of 2018 and is likely to have surpassed that level in the final quarter of the year. As of Jan. 11, the S&P Global Market Intelligence consensus fourth-quarter 2018 average daily production estimate for Exxon was 4.0 MMboe/d.

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As part of a larger plan to inject $50 billion into its U.S. assets over five years, Exxon disclosed an aggressive plans in early 2018 to triple its Permian output to 600,000 boe/d by 2025. In January, Exxon said it has spent more than $2.0 billion in infrastructure aimed at improving logistics between its Permian Basin production and Gulf Coast markets.

"We see potential for more acquisition opportunities, even beyond its recent Permian acquisitions. We also see a strong pipeline of upstream assets and the downstream unit should benefit over the long term from its complex large refineries," according to a Jan. 5 report from CFRA Equity Research.

The S&P Global Market Intelligence normalized consensus earnings estimate for the fourth quarter of 2018 for Exxon was $1.17 per share as of Jan. 11, down from $1.46 per share in the third quarter of 2018. For the full year 2018, the S&P Global Market Intelligence consensus earnings projection was $4.55 per share, rising from an actual $3.59 per share for the full year 2017.

While returning capital to shareholders in the form of dividends remains a priority, stock buybacks at Exxon are not likely anytime soon. The company will only pursue stock repurchases after prioritizing a robust balance sheet and growth outlook, Exxon Chairman and CEO Darren Woods said Jan. 8 at the Goldman Sachs Global Energy Conference.

In July 2018, California-based Chevron joined the ranks of peers Royal Dutch Shell PLC, BP p.l.c. and Equinor announcing it would launch a share repurchase program, which offset a miss in the company's second-quarter 2018 earnings. Chevron, which said it would buy back $3 billion of shares, had not repurchased stock since 2014 when global crude prices began to crumble. In the third quarter of 2018 Chevron spent $750 million on share repurchases.

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As of Jan. 11, the S&P Global Market Intelligence fourth-quarter 2018 normalized consensus earnings estimate for Chevron was $1.95 per share, down from an actualized $2.44 per share in the third quarter of 2018. For the full year 2018, the S&P Global Market Intelligence consensus earnings projection was $8.13 per share, up almost 120% from an actual $3.70 per share for the full year 2017. This would mark the company's best earnings showing since 2014 when oil prices started to crumble.

Despite the expected quarterly earnings downturn, reduced capital spending, rising output and strong returns from upstream investments are likely to boost the major's full-year earnings. The company, which represents the largest producer in the Permian based on volumes, saw production from the region surge 80% on the year in the third quarter of 2018.

As of Jan. 11, the S&P Global Market Intelligence consensus fourth-quarter 2018 average daily production estimate for Chevron was 3.0 MMboe/d, up 9% from 2.96 MMboe/d in the third quarter of 2018.

Chevron's free cash flow was almost $6 billion in the third quarter of 2018, with fourth-quarter 2018 estimates pegged near $4.7 billion. Analysts expect Chevron's 2018 cash flow will reach $18 billion.

"We think some of the boost to free cash flows should be driven by improved crude oil prices and by growth in major capital projects," CFRA said in another Jan. 5 research note.

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