The collapse in the price of oil has failed to dampen Chevron’s earnings ability, as the integrated nature of its business allows it to be hedged against large swings in the price of oil. The second-largest oil company in the world, it has a model in place that covers all aspects of the industry from upstream to downstream which allows for profits and losses to be offset internally.
The decline in revenue suffered in the oil and gas exploration division was more than offset by the surge in profits in the refining business. Weak oil prices benefit the refineries which intake crude oil and create products like diesel and heating oil. In its third-quarter, the income from the upstream business dropped by over $440 million, but profits at the refinery business jumped by just over $1 billion and drove a 13% jump in third-quarter profits. The slump in the oil market has prompted Chevron to cut capital expenditure by 11%, and as the commodity remains under pressure further cuts will be in the pipeline.
The share price performance of the company can’t escape being linked to the price of oil, even though the company is to some extent protected from the swings in the underlying energy. The recent high in Chevron’s share price coincided with the spike in oil in July, and both have been in decline since then. King Salman of Saudi Arabia holds the same view as his predecessor and is keen to keep the nation’s output levels unchanged, which will ensure low oil prices for the foreseeable future. According to the Commodity Futures Trading Commission, the number of hedge funds taking a short position on US light crude oil is at its highest level since September 2010.
The number of short positions being taken out on Chevron is close to a seven-month high; shorting of the company has increased by 27% since the third-quarter results was reported.
Chevron will reveal its full-year figures on Friday 30 January. The consensus is for revenue of $212 billion and EPS of $9.64. These forecasts equate to a 7% decline in revenue and a 12% drop in EPS. The oil company will also announce its fourth-quarter figures on the same date, and traders are anticipating revenue of $35.87 billion and EPS of $1.64. Last year’s fourth-quarter revenue and EPS were $56.25 billion and $2.57 respectively.
Equity analysts are bullish on Chevron, and, out of the 31 recommendations, 13 are buys, 16 are holds and two are sells. The average target price is $117.50, which is 13% above the current price. Investment banks are also bullish on Exxon, and, out of the 32 ratings, 13 are buys, 16 are holds, and three are sells. The average target price is $97.37, which is 10% above the current price.
The stock has been in a downward trend since July, and there is no sign of it letting up. The 50-day moving average is acting as resistance at $109.71, and if this metric is held $100 will be the target.