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Chevron Reports First Quarter Loss of $725 Million

Chevron Corporation (NYSE:CVX) today reported a loss of $725 million ($0.39 per share – diluted) for first quarter 2016, compared with earnings of $2.6 billion ($1.37 per share – diluted) in the 2015 first quarter. Foreign currency effects decreased earnings in the 2016 quarter by $319 million, compared with an increase of $580 million a year earlier.

Sales and other operating revenues in first quarter 2016 were $23 billion, compared to $32 billion in the year-ago period.

Earnings Summary

Three Months
Ended March 31

Millions of dollars 2016 2015
Earnings by business segment
Upstream $ (1,459 ) $ 1,560
Downstream 735 1,423
All Other (1 ) (416 )
Total (1)(2) $ (725 ) $ 2,567
(1) Includes foreign currency effects $ (319 ) $ 580
(2) Net income (loss) attributable to Chevron Corporation (See Attachment 1)

“First quarter results declined from a year ago,” said Chairman and CEO John Watson. “Our Upstream business was impacted by a more than 35 percent decline in crude oil prices. Our Downstream operations continued to perform well, although overall industry conditions and margins this quarter were weaker than a year ago.”

“Our efforts are focused on improving free cash flow,” Watson stated. “We are controlling our spend and getting key projects under construction online, which will boost revenues. We announced first LNG production and first cargo shipment from Train 1 at the Gorgon Project in March. Production from the Angola LNG plant is imminent and a cargo shipment is expected in May. Earlier in the year, we started up production at the Chuandongbei Project in China, and we continue to ramp up production in the Permian Basin and elsewhere.”

“We continue to lower our cost structure with better pricing, work flow efficiencies and matching our organizational size to expected future activity levels,” Watson added. “Our capital spending is coming down. We are moving our focus to high-return, shorter-cycle projects and pacing longer-cycle investments.”

UPSTREAM

Worldwide net oil-equivalent production was 2.67 million barrels per day in first quarter 2016, compared with 2.68 million barrels per day in the 2015 first quarter. Production increases from project ramp-ups in the United States, Nigeria and other areas, and production entitlement effects in several locations, were offset by the Partitioned Zone shut-in and normal field declines.

U.S. Upstream

Three Months
Ended March 31

Millions of Dollars 2016 2015
Earnings $ (850 ) $ (460 )

U.S. upstream operations incurred a loss of $850 million in first quarter 2016 compared to a loss of $460 million from a year earlier. The decrease was due to lower crude oil and natural gas realizations, partially offset by lower operating expenses.

The company’s average sales price per barrel of crude oil and natural gas liquids was $26 in first quarter 2016, down from $43 a year ago. The average sales price of natural gas was $1.32 per thousand cubic feet, compared with $2.27 in last year’s first quarter.

Net oil-equivalent production of 701,000 barrels per day in first quarter 2016 was up 2,000 barrels per day from a year earlier. Production increases due to project ramp-ups in the Gulf of Mexico, the Marcellus Shale in western Pennsylvania, and the Permian Basin in Texas and New Mexico were mostly offset by maintenance-related downtime in the Gulf of Mexico, normal field declines and the effect of asset sales. The net liquids component of oil-equivalent production in first quarter 2016 was essentially unchanged at 490,000 barrels per day, while net natural gas production increased 1 percent to 1.27 billion cubic feet per day.

International Upstream

Three Months
Ended March 31

Millions of Dollars 2016 2015
Earnings* $ (609 ) $ 2,020
*Includes foreign currency effects $ (298 ) $ 522

International upstream operations incurred a loss of $609 million in first quarter 2016 compared with earnings of $2.02 billion a year earlier. The decrease was due to lower crude oil and natural gas realizations, the absence of a first quarter 2015 reduction in statutory tax rates in the United Kingdom, and lower gains on asset sales. Partially offsetting these effects were higher liftings and lower exploration expenses. Foreign currency effects decreased earnings by $298 million in the 2016 quarter, compared with an increase of $522 million a year earlier.

The average sales price for crude oil and natural gas liquids in first quarter 2016 was $29 per barrel, down from $46 a year earlier. The average price of natural gas was $3.91 per thousand cubic feet, compared with $5.01 in last year’s first quarter.

Net oil-equivalent production of 1.97 million barrels per day in first quarter 2016 decreased 17,000 barrels per day, or 1 percent, from a year ago. Production increases from project ramp-ups in Nigeria and other areas, and production entitlement effects in several locations, were more than offset by the Partitioned Zone shut-in and normal field declines. The net liquids component of oil-equivalent production decreased 2 percent to 1.29 million barrels per day in the 2016 first quarter, while net natural gas production was essentially unchanged at 4.04 billion cubic feet per day.

DOWNSTREAM

U.S. Downstream

Three Months
Ended March 31

Millions of Dollars 2016 2015
Earnings $ 247 $ 706

U.S. downstream operations earned $247 million in first quarter 2016 compared with earnings of $706 million a year earlier. The decrease was primarily due to lower margins on refined products, an asset impairment, higher operating expenses primarily due to planned turnaround activity in first quarter 2016, and lower earnings from the 50 percent-owned Chevron Phillips Chemical Company LLC.

Refinery crude oil input in first quarter 2016 increased 4 percent to 957,000 barrels per day from the year-ago period.

Refined product sales of 1.21 million barrels per day were unchanged from first quarter 2015. Branded gasoline sales of 510,000 barrels per day were up 1 percent from the 2015 period.

International Downstream

Three Months
Ended March 31

Millions of Dollars 2016 2015
Earnings* $ 488 $ 717
*Includes foreign currency effects $ (48 ) $ 54

International downstream operations earned $488 million in first quarter 2016 compared with $717 million a year earlier. The decrease was primarily due to lower margins on refined product sales, partially offset by lower operating expenses and a favorable change in effects on derivative instruments. Foreign currency effects decreased earnings by $48 million in first quarter 2016, compared with an increase of $54 million a year earlier.

Refinery crude oil input of 795,000 barrels per day in first quarter 2016 increased 13,000 barrels per day from the year-ago period, mainly due to lower turnaround activity, partially offset by the divestment of Caltex Australia Limited.

Total refined product sales of 1.44 million barrels per day in first quarter 2016 were down 144,000 barrels per day from the year-ago period, mainly as a result of the Caltex Australia Limited divestment.

ALL OTHER

Three Months
Ended March 31

Millions of Dollars 2016 2015
Earnings* $ (1 ) $ (416 )
*Includes foreign currency effects $ 27 $ 4

All Other consists of worldwide cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities and technology companies.

Net charges in first quarter 2016 were $1 million, compared with $416 million in the year-ago period. The change between periods was mainly due to lower corporate tax items.

CASH FLOW FROM OPERATIONS

Cash flow from operations in first quarter 2016 was $1.1 billion, compared with $2.3 billion in the corresponding 2015 period. Excluding working capital effects, cash flow from operations in first quarter 2016 was $2.1 billion, compared with $4.3 billion in the corresponding 2015 period.

CAPITAL AND EXPLORATORY EXPENDITURES

Capital and exploratory expenditures in first quarter 2016 were $6.5 billion, compared with $8.6 billion in the corresponding 2015 period. The amounts included $791 million in first quarter 2016 and $730 million in the corresponding 2015 period for the company’s share of expenditures by affiliates, which did not require cash outlays by the company. Expenditures for upstream represented 92 percent of the companywide total in first quarter 2016.

NOTICE

Chevron’s discussion of first quarter 2016 earnings with security analysts will take place on Friday, April 29, 2016, at 8:00 a.m. PDT. A webcast of the meeting will be available in a listen-only mode to individual investors, media, and other interested parties on Chevron’s Web site at www.chevron.com under the “Investors” section. Additional financial and operating information will be contained in the Earnings Supplement that will be available under “Events and Presentations” in the “Investors” section on the Web site.

CAUTIONARY STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION FOR THE PURPOSE OF “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This press release contains forward-looking statements relating to Chevron’s operations that are based on management’s current expectations, estimates and projections about the petroleum, chemicals and other energy-related industries. Words or phrases such as “anticipates,” “expects,” “intends,” “plans,” “targets,” “forecasts,” “projects,” “believes,” “seeks,” “schedules,” “estimates,” “may,” “could,” “should,” “budgets,” “outlook,” “on schedule,” “on track” and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, many of which are beyond the company’s control and are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The reader should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. Unless legally required, Chevron undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Among the important factors that could cause actual results to differ materially from those in the forward-looking statements are: changing crude oil and natural gas prices; changing refining, marketing and chemicals margins; the company’s ability to realize anticipated cost savings and expenditure reductions; actions of competitors or regulators; timing of exploration expenses; timing of crude oil liftings; the competitiveness of alternate-energy sources or product substitutes; technological developments; the results of operations and financial condition of the company’s suppliers, vendors, partners and equity affiliates, particularly during extended periods of low prices for crude oil and natural gas; the inability or failure of the company’s joint-venture partners to fund their share of operations and development activities; the potential failure to achieve expected net production from existing and future crude oil and natural gas development projects; potential delays in the development, construction or start-up of planned projects; the potential disruption or interruption of the company’s operations due to war, accidents, political events, civil unrest, severe weather, cyber threats and terrorist acts, crude oil production quotas or other actions that might be imposed by the Organization of Petroleum Exporting Countries or other natural or human causes beyond its control; changing economic, regulatory and political environments in the various countries in which the company operates; general domestic and international economic and political conditions; the potential liability for remedial actions or assessments under existing or future environmental regulations and litigation; significant operational, investment or product changes required by existing or future environmental statutes and regulations, including international agreements and national or regional legislation and regulatory measures to limit or reduce greenhouse gas emissions; the potential liability resulting from other pending or future litigation; the company’s future acquisition or disposition of assets and gains and losses from asset dispositions or impairments; government-mandated sales, divestitures, recapitalizations, industry-specific taxes, changes in fiscal terms or restrictions on scope of company operations; foreign currency movements compared with the U.S. dollar; material reductions in corporate liquidity and access to debt markets; the effects of changed accounting rules under generally accepted accounting principles promulgated by rule-setting bodies; the company’s ability to identify and mitigate the risks and hazards inherent in operating in the global energy industry; and the factors set forth under the heading “Risk Factors” on pages 21 through 23 of the company’s 2015 Annual Report on Form 10-K. Other unpredictable or unknown factors not discussed in this press release could also have material adverse effects on forward-looking statements.

Attachment 1
CHEVRON CORPORATION – FINANCIAL REVIEW
(Millions of Dollars, Except Per-Share Amounts)

CONSOLIDATED STATEMENT OF INCOME

(unaudited) Three Months
Ended March 31
REVENUES AND OTHER INCOME 2016 2015
Sales and other operating revenues * $ 23,070 $ 32,315
Income from equity affiliates 576 1,401
Other income (loss) (93 ) 842
Total Revenues and Other Income 23,553 34,558
COSTS AND OTHER DEDUCTIONS
Purchased crude oil and products 11,225 17,193
Operating, selling, general and administrative expenses 6,402 6,339
Exploration expenses 370 592
Depreciation, depletion and amortization 4,403 4,411
Taxes other than on income * 2,864 3,118
Total Costs and Other Deductions 25,264 31,653
Income (Loss) Before Income Tax Expense (1,711 ) 2,905
Income tax expense (benefit) (1,004 ) 305
Net Income (Loss) (707 ) 2,600
Less: Net income attributable to noncontrolling interests 18 33
NET INCOME (LOSS) ATTRIBUTABLE TO
CHEVRON CORPORATION $ (725 ) $ 2,567
PER-SHARE OF COMMON STOCK

Net Income (Loss) Attributable to Chevron Corporation

– Basic $ (0.39 ) $ 1.38
– Diluted $ (0.39 ) $ 1.37
Dividends $ 1.07 $ 1.07

Weighted Average Number of Shares Outstanding (000’s)

– Basic 1,869,775 1,866,655
– Diluted 1,869,775 1,876,498
* Includes excise, value-added and similar taxes. $ 1,652 $ 1,877
Attachment 2
CHEVRON CORPORATION – FINANCIAL REVIEW
(Millions of Dollars)
(unaudited)

EARNINGS BY MAJOR OPERATING AREA

Three Months
Ended March 31
2016 2015
Upstream
United States $ (850 ) $ (460 )
International (609 ) 2,020
Total Upstream (1,459 ) 1,560
Downstream
United States 247 706
International 488 717
Total Downstream 735 1,423
All Other (1) (1 ) (416 )
Total (2) $ (725 ) $ 2,567

SELECTED BALANCE SHEET ACCOUNT DATA

Mar. 31,
2016

Dec. 31,
2015

Cash and Cash Equivalents $ 8,562 $ 11,022
Marketable Securities $ 317 $ 310
Total Assets (3) $ 263,842 $ 264,540
Total Debt (3) $ 42,339 $ 38,549
Total Chevron Corporation Stockholders’ Equity $ 150,307 $ 152,716
Three Months
Ended March 31

CASH FLOW FROM OPERATIONS

2016 2015
Net Cash Provided by Operating Activities $ 1,141 $ 2,319
Net Increase in Operating Working Capital $ (993 ) $ (1,985 )

Net Cash Provided by Operating Activities Excluding Working Capital

$ 2,134 $ 4,304
Three Months
Ended March 31

CAPITAL AND EXPLORATORY EXPENDITURES (4)

2016 2015
United States
Upstream $ 1,276 $ 2,318
Downstream 421 285
Other 22 63
Total United States 1,719 2,666
International
Upstream 4,690 5,842
Downstream 59 75
Other 1
Total International 4,750 5,917
Worldwide $ 6,469 $ 8,583

(1) Includes worldwide cash management and debt financing activities, corporate administrative functions, insurance operations, real estate activities, and technology companies.

(2) Net Income (Loss) Attributable to Chevron Corporation (See Attachment 1)
(3) 2015 conforms to 2016 presentation.
(4) Includes interest in affiliates:
United States $ 336 $ 234
International 455 496
Total $ 791 $ 730
Attachment 3
CHEVRON CORPORATION – FINANCIAL REVIEW
Three Months

OPERATING STATISTICS (1)

Ended March 31
NET LIQUIDS PRODUCTION (MB/D): (2) 2016 2015
United States 490 489
International 1,291 1,312
Worldwide 1,781 1,801
NET NATURAL GAS PRODUCTION (MMCF/D): (3)
United States 1,266 1,257
International 4,044 4,026
Worldwide 5,310 5,283
TOTAL NET OIL-EQUIVALENT PRODUCTION (MB/D): (4)
United States 701 699
International 1,965 1,982
Worldwide 2,666 2,681
SALES OF NATURAL GAS (MMCF/D):
United States 3,808 4,139
International 4,558 4,445
Worldwide 8,366 8,584
SALES OF NATURAL GAS LIQUIDS (MB/D):
United States 129 128
International 88 107
Worldwide 217 235
SALES OF REFINED PRODUCTS (MB/D):
United States 1,210 1,206
International (5) 1,436 1,580
Worldwide 2,646 2,786
REFINERY INPUT (MB/D):
United States 957 918
International 795 782
Worldwide 1,752 1,700
(1) Includes interest in affiliates.
(2) Includes net production of synthetic oil:
Canada 49 51
Venezuela Affiliate 27 30
(3) Includes natural gas consumed in operations (MMCF/D):
United States 67 69
International 428 451

(4) Oil-equivalent production is the sum of net liquids production, net natural gas production and synthetic production. The oil-equivalent gas conversion ratio is 6,000 cubic feet of natural gas = 1 barrel of crude oil.

(5) Includes share of affiliate sales (MB/D): 369 485

READ CHEVRON’S CONFERENCE CALL TRANSCRIPT HERE.

Analyst Commentary

Bank of America Merrill Lynch


Clean EPS of $(0.11) betters consensus of $(0.18)
CVX 1Q16 clean EPS of $(0.11) was slightly ahead of consensus of $(0.18) and BofAML at $(0.16). A headline loss of $0.39 was primarily impacted by foreign currency adjustments of $390mm and a series of impairments in both E&P and Refining. Versus our estimate the beat was mainly at the corporate level, with management calling out favorable tax effects, which may temper the market response to the EPS beat. However, greater focus still is still likely on cashflow. Headline capex of $6.5bn (including ~$800mm of affiliates) and dividends of $2bn compared with operating cashflow of ~$1.1bn for a net cash burn in the quarter of ~$6.1bn. Net debt / cap rate now stands at ~18% up from ~15% at year-end 2015. Overall, no major surprises but nature of the headline EPS beat may temper relative performance on the day.
Resilient production, with multiple project starts ahead
Oil and gas production of 2.66 mmboepd was essentially flat year over year, benefitting from the start up major projects and another solid quarter of reliability seemingly slowing base production declines. Notable is a modest uptick in yoy US gas production in contrast to the majority of the industry that is in decline. Note that flat yoy production was in spite of the ongoing shut-in at the Partitioned Zone. CVX achieved first production and cargo at Gorgon in March - but with little uptime. Associated repairs are under way with an expected restart in May consistent with prior guidance. At Wheatstone, management reaffirmed its expectation of first LNG by mid-2017. Other major projects continue to benefit growth with notable start-ups at Angola LNG in May, a third train at Chuandongbei in 2Q16, and Alder, Bangka and Mafumeira Sul all expected in 2H16.
Disposal plans and $52 oil break-even in focus
Given the recent analyst update in March, other major guidance items are unchanged - although a dedicated slide in the results presentation reiterates planned disposals of $5bn -$10bn target and the assets in the public domain. Management also highlights a targeted cash break-even of ~$52/bbl in 2017, underlining that in the current environment cash burn likely continues. While the shares retain high relative leverage versus peers to an oil price recovery, for CVX the benefit reduces cash burn in contrast to larger peers that return to free cashflow.
Retain Neutral: CVX 'discounts' long term oil in the low $70's
Coupled with the strong rebound in the share price since Sep-15, we believe that appropriate rating is Neutral. Note that at current levels we estimate that Chevron's share price discount's long-term oil prices in the low $70's - that while below our long term assumption of $75 WTI / $80 Brent, stands at the very high end of the large cap US oils.

J.P. Morgan

1Q was a messy quarter, with pre-working capital FCF that was well below our model, and several one-time factors called out. Capital spending came in below and is trending toward the full year guidance. Bigger picture, nothing has materially changed with the FCF inflection story, with 1Q likely representing the trough on all fronts. However, execution needs to pick up as the year progresses to drive idiosyncratic upside, in our view. We remain OW with a price target of $113/share, up from $98/share, which represents an increase in our price deck to $55/bbl in 2018+.
• Tough 1Q CFO, partially one-time. 1Q CFO of $1.1B (JPMe $3.5B) was challenged by the macro environment, as well as one-time factors like working capital ~($1B), pension, affiliates contribution at low prices. Soft 1Q CFO drove a miss on FCF as well (-$4.5B vs. JPMe -$2.3B), with 1Q cash capex at $5.6B.
• Project execution and long term shorter cycle focus. Commentary on project execution aimed to assure investors on progress made on Gorgon Train 1 and Angola LNG, expecting restarts of both in May. On Gorgon, timing of Trains 2 & 3 was reiterated at approximately 6 months intervals apart. First LNG at Wheatstone was reaffirmed at mid-2017 and Alder, Bangka and Mafumeira Sul are still on track to start in 2H16. Longer term, the focus will shift from long to short cycle projects, in particular the Permian, where CVX sees 4k wells with 10% IRR at $50/bbl.
• Asset sales target looking more back-end loaded, but doable. CVX maintained its 2016-17 asset sales target of $5-10B with ~$2B proceeds this year, suggesting the majority of the sales will be in 2017. Based on publicly disclosed assets for sale, it still appears that sizeable transactions could happen (e.g. Asia geothermal). 2Q16 transactions include Western Canadian gas storage facilities, GoM shelf, KLM pipeline and New Zealand marketing, with Hawaii downstream in progress.
• Targeting low-20% mid-cycle leverage. When asked how investors should think about the balance between project ramp-ups and credit levels, management noted that they are generally comfortable with a low-20% mid-cycle debt ratio, but may be willing to flex to the low-30s% while investing counter-cyclically.
• Raising price target on higher price deck. On a $55/bbl Brent deck for 2018+, our Dec-16 price target is now $113/share, based on a 5.5% 2018E sustaining FCF yield.

Morgan Stanley

CVX reports clean $0.11/sh loss, beating on strong international downstream (same as peers). Discussion on call focused on asset sales ($2Bn on $5-10Bn 2016-17 program to close this year) and operational execution (efficiency improvements outside of US shale).

CVX reported clean 1Q16 loss of $0.11/sh, above both MS' $0.25/sh loss and the Street's $0.20/sh forecast. Our clean EPS excludes $46MM ($0.02/sh) of FX and $195MM ($0.10/sh) of impairments (predominantly downstream). Adjusted upstream US loss of $765MM significantly undershot our forecast due to 4% lower production volumes and 2% lower oil realizations. Adjusted international upstream results of -$311MM also missed, as better than expected liquids volumes (by 2%) were offset by 5% lower oil realizations. The beat vs. MS was driven primarily by international downstream, which, similar to XOM, delivered close to 2x our expected earnings helped in part by $290MM in FX. US downstream also contributed to the beat, coming in 30% above MS. Downstream strength likely expected following strong results from BP (R&M up 49% QoQ and 64% above Consensus) and TOT (refining and chemicals earnings up 12% QoQ and 22% above Consensus) reported earlier this week. However, downstream beats are viewed as less repeatable in 2016 given fading margin outlook and, hence, less credited in stock today. Global production of 2.67MMboed exceeded consensus' 2.63MMboed, holding flat vs 4Q15 (liquids mix ticked up slightly to 67% from 66%). Lower turnaround activity in 1Q16 vs. the pior quarter added 25 Mboed total volumes. In the US, Permian volumes were negatively impacted by 5 Mboed due to weather and infrastructure related downtime. Strength in international liquids volumes and international gas realizations stood out vs. our expectations.
Funding review. CVX's net debt increases by $6.2bn over the course of 1Q16, ~50% of 2015 total ~$13Bn increase. CFO for the quarter down at $1.1Bn ($2.1Bn x-WC) vs. $6.5Bn in consolidated capex. Outspend exacerbated by a $1Bn in working capital build. Asset disposal proceeds were ~$100MM in the quarter vs. ~$2Bn management expectation for the full year.
Key takeaways from the call:
(1) Asset disposals. CVX plans on ~$2Bn of sales closing in 2016 with the balance of its $5-10Bn 2016-17 disposal program next year. Just $100MM was closed in 1Q16. Myanmar and SE Asia geothermal the two disclosed additions to the for-sale list (Exhibit2). The back-end-loaded sales trajectory is consistent with our view that asset and corporate deal flow should increase substantially once market has a line of sight to recovery (meaning likely 2017). We are also encouraged by monetization success had by E&Ps (most recently MRO, MUR, DVN). Yet the back end loading increases perception of execution risk. Given asset sales factor into decision where to place 2017 capex in broad $17-22Bn guidance range, this could have impact on CVX's activity level and production trajectory (all else equal).
(2) Efficiencies and operating execution. With Joe Geagea (EVP, Technology, Projects and Services) participating in the call, CVX highlighted efficiency gains and operational execution. Focus was on international/offshore assets, and tone was similar to US E&Ps discussion of similar gains in domestic unconventionals. Specific examples provided were a 45% increase in drilling speeds in Thailand (over 2 years) and 30% vessel cost saving from logistics improvement in West Africa (Exhibit3). CVX also discussed its drive to lock-in cyclical trough OFS pricing (in one noted case out to 2022), supplier consolidation (from 35 to four) and generally higher standardization (a theme we've heard discussed by multiple top tier offshore operators). Focus on learnings/best practice application, contractor selection, and contract structuring also emphasized during the Q&A. Management believes "it is a tremendous time for [CVX] to actually deliver better on those [large long-cycle] projects" and notes ongoing positive impact on execution risk from shift towards unconventionals.
(3) Gorgon Train 1 restarts "in the next few weeks", ramp still 6-8 months/ Train 2 and 3 progressing and should start up at 6 months intervals. Wheatstone on schedule. No changes to capex budgets for either.
(4) Surprisingly, no Neutral Zone restart questions were asked on the call, given potential impact on crude macro. At the end of March, Kuwaiti acting oil minister made a statement that the country has reached an agreement with Saudi Arabia to gradually restart production from the ~300Mbld Khafji field. Yet according to more recent industry press it appears that this restart is yet to take place with no clarity as to likely timing.
(5) Definitive language on prioritization on buyback from management: "I don't see share repurchases coming into play in the medium-term here. That is the last use of cash and I don't see us being in a position where that would be a relevant item for us in the medium-term."

Cowen

While bottom of the trough conditions resulted in CVX's first quarterly loss in decades, the remainder of the year frames upside as commodity prices rebound off February lows and large cash accretive projects come online in 2Q16. CVX upside supported by growth, solid balance sheet strength and differentiated Permian asset.
Upstream weakness continues to impact results
1Q16 adjusted EPS of -$0.11/sh (reported -$0.39/sh) compares to Cowen estimate of -0.18, consensus -$0.18/sh. Adjustments exclude $319 MM in FX impacts and $390 MM in special items. Upstream weakness continues to impact company results with a reported loss of >$1B. Downstream results were relatively in line with our estimates. Results benefited from lower than expected corporate charges. 1Q16 production was flat sequentially and up 2% vs FY2015, in line with full year guidance of 0-4% growth.
Project execution and Permian position frame upside
Following years of intense capital spending, CVX has one of the highest growth outlooks in the group, adding roughly 350 mmboed through 2020. We expect new production to be cash flow accretive even at today's prices as long plateau LNG capacity with relatively low cash costs and short cycle unconventional activity ramp up. After temporarily shutting down after 1st cargo, Gorgon is expected to restart in May and T2 & 3 remain on schedule to ramp up in 6 month increments from initial start in March. Angola LNG is also expected to restart in May. The company has lowered Permian well costs by 40% and currently has ~4,000 well locations with 10% returns at $50/bbl WTI.
Focus on capital management, CF balance in 2017
CVX expects CF neutrality at $52/bbl Brent in 2017 as capex reduces from $25B in 2016 to $17-22B in 2017/18. The capex range will likely be determined by oil price, project execution and success of the $5-10B divestment program. The company continues to manage down capex and reduce operating costs with y/y declines of 19% and 6%, respectively. Headcount is expected to be reduced by 8,000 in 2016. Along with cost saving initiatives, CVX will likely utilize its balance sheet strength to complete upcoming projects while the oil price recovers. With a debt ratio currently around 22%, CVX has the capacity to raise $25-30B of incremental debt before approaching 30% range, which mgmt. feels comfortable with temporarily. Meanwhile, while distribution growth and sustainability remains a top priority, the timing of any dividend growth will likely depend on oil price and project ramp up. We note, however, management mentioned that they are taking into account the importance of their 28 year track record of consecutive annual dividend increases.  


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