Chevron, The Economic Mess, and Tumbling Oil (CVX)

Yesterday’s interim update report from Chevron (NYSE:CVX) came out pretty much as we expected. The company projects significant improvement in downstream earnings and a drop in upstream earnings. Hurricanes in the Gulf of Mexico are expected to cause production for September to fall by 150,000 b/d. Chevron also plans to write off $400 million for hurricane damage.

International crude and liquids production is already down 6% for thefirst two months of the quarter, and Chevron expects that to continue.Prices have been higher for the two months, but September pricerealizations are certain to be lower.

Downstream refining and marketing benefited from the drop in crude oilprices. Marketing margins got the bigger boost–up from $1.18/b on theWest Coast to $10.04/b for July and August. Only in Latin America didmarketing margins fall. This reflects the fact that pump prices did notfall as fast as crude prices because Chevron priced its gasoline atwhat consumers would pay.

Historically, when crude prices fall, oil companies restrictinvestment. E&P spending and capex are reined in significantly. Sofar, none of the big integrated oil companies have announced pullbacksin investments because they’re sitting on piles of cash from nearly twoyears of high crude prices.

The bad news is that the global economy weighs heavily on demand forenergy. The International Energy Agency (IEA) now projects that globaldemand for crude for 2008 will increase by just 0.5%, down a full pointfrom original estimates. The IEA’s estimate for 2009 is also lower.Production cuts from OPEC are not likely to have much effect on crudeprices unless the cuts are dramatic. And that is not likely to happenbecause OPEC members need the cash that oil exports generate.

Until the world’s financial mess is sorted out, and governments move torestore confidence in the markets, no amount of oil in the ground orsignificant quarterly earnings will direct oil company share pricesback up.

Paul Ausick
October 10, 2008