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Chevron strikes big in Mexico

Chevron will announce its third-quarter results before the market opens on Friday 31 October. The announcement will include details of its discovery in Mexico.

Oil platform
Source: Bloomberg

Chevron and BP announced they had struck a ‘significant oil pay’ in the Gulf of Mexico. Tomorrow’s earnings release is expected to provide more details of the find, and dealers are anticipating ‘significant production growth over the next two years’.

Production in the Deepwater Gulf of Mexico is expected to begin before the year is out. The oilfields in the region can be difficult to operate as the temperature and pressure can be high, so extraction can be more timely and costly, but the amount of oil could be substantial. BP is still paying the price for the Deepwater Horizon disaster in the Gulf of Mexico four years ago, in which 11 people lost their lives, and major lessons have been learned when it comes to safety procedures.

In August, Chevron announced second-quarter revenue and earnings per share of $57.93 billion and $2.58 respectively. Analysts were expecting revenue of $56.9 billion and EPS of $2.63. The stock came under pressure as traders worried about declining production levels. At the beginning of the month, Chevron was given the green light to expand its project in Kazakhstan but it will cost the US oil giant $40 billion to do so, which is over 70% higher than the original cost estimate. Output at the Kazak operation increased by 12% in the last year and when expansion is completed in 2019, production is predicted to be 40% higher again.

Equity analysts are moderately bullish on Chevron. Out of 32 recommendations on the stock, 16 are buys, 13 are holds and three are sells — equity analysts hold similar stance on Exxon Mobil.

The number of short positions taken out on the stock has actually been declining since the price of oil peaked in July, and shorting is now at its lowest level since February. The consensus for third-quarter revenue and EPS is $52.96 billion and $2.52 respectively. In comparison, the third-quarter figures for 2013 were revenue of $58.5 billion and EPS of $2.57.

Even though production in the second quarter declined, the blow was softened by high crude prices. Now that oil has fallen 25% in the past quarter traders may not be so forgiving if output keeps falling while costs keep rising. In the middle of October, the share price dropped to $106.33, its lowest level since December 2012, and weak figures tomorrow could retest that low. To the upside, $120 is the immediate target, and then the 200-day moving average of $122 is the next level to watch. 

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