CVX Stock: Here’s the Problem for Chevron Corporation

CVX StockLow Oil Prices are Hammering Chevron Stockholders

Chevron Corporation (NYSE:CVX) performed better than analysts had expected in its third-quarter 2015 earnings, but the CVX stock price is continuing the struggle to find some uplift in the ongoing low oil price environment.

The company announced massive job cuts, downgraded its production targets, and is now facing a possible collapse in the Chevron stock price as the ongoing oil price downturn continues to hammer away at energy companies.

Chevron announced a shocking 10% reduction in its global workforce on Friday as a direct result of low crude oil prices. Despite posting better-than-expected third-quarter results, it’s staring at the prospect of a prolonged contraction in its medium-term growth prospects. (Source: “Chevron eyes 7,000 job cuts as profits slide for the fourth-straight quarter,” Financial Post, October 30, 2015.)

Between 6,000 and 7,000 jobs will be eliminated as the oil major continues to look for ways to reduce its operating expenses to offset shrinking profit margins. Included in this figure are the 1,500 jobs slated for elimination earlier in 2015.

Production growth was reduced yet again, with a 13% to 15% growth in crude oil and natural gas output forecasted by December 2017. The company had previously estimated that total output growth would be in the range of 20%.

There does not appear to be any reprieve for the Chevron stock price in the near future, as the company’s earnings report was merely bad, while analysts had been expecting the results to be horrible. Earnings per share were $1.09 per share, while analysts surveyed by Bloomberg had forecasted it to be $0.76 a share. (Source: “Chevron Cuts Jobs, Spending, Growth Target as Slump Persists,” Bloomberg, October 30, 2015.) Some relief was found in Chevron’s refining segment, which posted a 59% jump in profits to $2.2 billion due to plummeting crude oil prices. Overall spending in 2016 will be approximately 25% lower than this year, according to a statement by chevron CEO John Watson.

What investors and analysts alike have been fearful over is the fact that Chevron’s spending habits have outstripped its cash flow. The latest moves to staunch the outflow of liquid cash is a positive move by the company to alleviate investors’ concerns, but the company’s balance sheet crisis will continue until oil prices rally back to a reasonable level and restore a reasonable profit margin.

The Bearishness of the Oil Market

Brent crude, the global benchmark oil blend, has dropped in value by more than 50% since the summer of 2014. This decline is in fact the greatest 12-month drop in the value of crude oil since 1988. Global oversupply, broader economic instability, and surging production both inside and outside OPEC have put energy companies in a tough spot indeed. Additional fears of Iran’s return to global oil markets are exacerbating the oversupply issue and sending crude oil prices even lower. This continues to cast a bear’s shadow on energy prices. With slumping commodity demand growth in China, India, and other major emerging markets, you have the recipe for a protracted low oil price environment, perhaps even lasting for years rather than months.

But how will companies such as Chevron respond?

Further reductions in spending can be expected in 2016, 2017, and even further into the future, according to Chevron executives. If the company can’t control the price of oil, at least it can adjust its balance sheet to the best of its ability and rely more heavily on refining profits to offset some of the loss in the short term.

There may be no stopping the downward trajectory of the Chevron stock price movement however, with the CVX price dropping by nearly 20% since the beginning of 2015. In simple terms, every $1.00 drop in the average price of Brent crude oil translates to a cash flow reduction of between $325 and $350 million for Chevron.

The real question here is what exactly Chevron can do to stop the process, or at the very least slow down its decline.

Chevron is forecasted to see expenses outpace its cash flow until the fourth quarter of 2016 at the very earliest, if a Bloomberg survey of energy market analysts can be trusted. (Source: “Chevron Cuts Jobs, Spending, Growth Target as Slump Persists,” Bloomberg, October 30, 2015.) To a certain degree this is an unavoidable consequence of nose-diving oil prices. Basic math tells us that a 50% drop in the average market price of a company’s primary product is bad for any business; Chevron being no exception. Net income dropped to $2.04 billion from $5.59 billion, squeezing Chevron’s production profits into razor-thin territory. (Source: “Chevron’s stock gains after results beat expectations, and job cuts announced,” Market Realist, October 30, 2015.)

The Bottom Line on Chevron Stock

There’s no escaping the reality of Chevron’s situation. It is a large multinational corporation which has essentially had a monkey wrench thrown into its business model, in the form of low oil prices, and is doing anything and everything in its power to stay afloat. How well this plays out is almost entirely contingent on when crude oil prices finally do rebound and whether Chevron can downsize its bloated expenditures in time to stave off a total collapse in the Chevron stock price.

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