Chevron (CVX) remained profitable in the fourth quarter, posting earnings of $415 million as upstream earnings improved on higher commodity prices and lower costs. However, the results were weaker than expected, owing to increased tax and corporate expense and poor downstream results. Downstream earnings fell to $357 million from $1.1 billion a year earlier, as a turnaround at the Richmond refinery resulted in zero earnings from the U.S. segment. In future quarters, both items should revert to more normalized levels. As a result, we see nothing in the quarter to change our view of Chevron. Our fair value estimate and moat rating are unchanged.
While we see Chevron shares as fully valued, we think it remains one of the better-positioned integrateds to succeed in an environment of ongoing low oil prices. With production set to increase 4%-9% and capital spending set to fall dramatically this year, Chevron will be able to cover the dividend with free cash flow at current strip prices. Furthermore, Chevron maintains one of the higher-quality portfolios of its peer group, with new production delivering margin expansion. In 2017, three fourths of production will have cash margins of over $15/barrel of oil equivalent, compared with less than half in 2016. In addition, 70% of 2017’s $19.8 billion in capital spending will generate cash flow within two years, offering dividend protection in the event of weak oil prices in the next few years.
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