Chevron (click ticker for report: CVX) reported reduced second-quarter net income, as earnings growth in its downstream business failed to offset weakness in upstream operations. Our fair value estimate remains unchanged.
Global net oil production during the second quarter was 2.62 million barrels per day, down from 2.69 million barrels per day in the same period a year ago as project ramp-ups were offset by field declines (Frade Field in Brazil) and maintenance-related downtime. Though the firm benefited tremendously from improved margins on refined product sales in the quarter, Chevron continues to divest non-core assets in its downstream business—GS Caltex’s power operations in South Korea and several of its fuels-marketing and aviation businesses in the Caribbean. The firm continues to invest heavily in its capital and exploratory expenditures, with the firm spending $14.2 billion during the first six months of the year, almost all of it for upstream operations. We believe these substantial investments will bear fruit over the long haul, though any immediate return will be tempered by reduced energy prices caused by global economic uncertainty.
All things considered, we’re big fans of Chevron. Relative to peers, the firm is more heavily weighted to oil than natural gas in its operations (natural gas prices have been incredibly weak), has stronger margins (per barrel) in its upstream business, and has a significant positive net cash position (a consideration of our Valuentum Dividend Cushion™ measure). We’re expecting continued strong growth in its dividend for years to come, and the firm remains a holding in the portfolio of our Dividend Growth Newsletter.