Chevron profit down on reduced output, weak refining

Fri Nov 2, 2012 1:47pm EDT

A lit sign at Chevron's oil refinery in Richmond, California is seen through a window after a large fire erupted earlier in the evening on August 6, 2012. REUTERS/Susana Bates

A lit sign at Chevron's oil refinery in Richmond, California is seen through a window after a large fire erupted earlier in the evening on August 6, 2012.

Credit: Reuters/Susana Bates

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(Reuters) - Chevron Corp posted earnings on Friday that were much lower than expected as maintenance exacerbated a decline this year in oil and natural gas production, and shares of the second-largest U.S. oil company slid 2.5 percent.

Third-quarter production fell to 2.52 million barrels of oil equivalent per day from 2.60 million bpd a year earlier. With a fourth-quarter bounce expected, Chevron expected 2012 production to average about 2.6 million bpd, or 97 percent of its original 2.68 million bpd target.

Increasing output from the wellhead is a struggle for many big oil companies, including Exxon Mobil Corp and Royal Dutch Shell. With oil and gas assets tightly controlled by the countries where they are located, the majors are left to drill in pricier areas on land and offshore.

Smaller U.S. oil company Hess Corp, on the other hand, delivered on Friday a strong increase in profits and production owning to its interest in the Bakken oil basin in North Dakota, and a resurgent Libya operation.

For Chevron, the third quarter was marred by a huge fire at its Richmond refinery in California that damaged the crude unit there and now expected to be repaired in the first quarter. However, the company said this had a limited impact on third-quarter earnings, which were hit hard by weak marketing margins.

Overall, third-quarter net income fell to $5.25 billion, or $2.69 per share, from $7.83 billion, or $3.92 per share, a year earlier. Earnings dropped 17 percent to $5.1 billion in the oil and gas production business and plunged 65 percent to $689 million in the refining, or downstream, operation.

"Downstream was the primary culprit behind the miss," Simmons & Co analysts said in a note to investors.

The reported profit included about $600 million from an asset sale gain, offset by a negative foreign exchange impact, they said. Leaving out certain items, Chevron earned $2.55 per share, compared with the analysts' average estimate of $2.83, according to Thomson Reuters I/B/E/S.

Chief Executive Officer John Watson said that, apart from heavy planned oilfield maintenance, pricing for its output was also weaker. This was in part because of the oversupplied U.S. market for natural gas liquids, while the average Brent oil price of $110 per barrel was down $2 from a year before.

A storm cut into Gulf of Mexico production, while planned maintenance in Kazakhstan and the United Kingdom caused the majority of the production decline outside the United States, according to Chevron.

One downstream bright spot was that Chevron's smaller North American refineries in British Columbia and Salt Lake City were running discounted crude piped in from the Bakken, said Mike Wirth, executive vice president for downstream and chemicals.

A large spread between U.S. oil prices and international benchmark Brent has emerged due to the combination of a surge in North American oil production along with subdued U.S. demand and the limited ability to ship it out to international markets.

"On this crude disconnect, it is like real estate," Wirth told analysts on a conference call. "It is location, location, location, and our large coastal refineries are distant from where these advantages really are."

More broadly, Wirth said he was pessimistic about near-term demand for refined products based on the sales figures he saw in Asia and elsewhere.

Shares of Chevron were down 2.5 percent at $108.67 in early afternoon trading on the New York Stock Exchange. (Reporting by Braden Reddall in San Francisco; Editing by Gerald E. McCormick, Lisa Von Ahn and Tim Dobbyn)

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Comments (2)
americanguy wrote:
Exact same excuse Exxon Mobile used to justify trying to jack up prices when there is a world glut of oil and gas. Even China is using 15% less oil. They have run out of storage for the surplus and yet prices are at record highs.
Not buying what they are selling.
Go sell it to Romney supporters, they will believe anything.

Nov 02, 2012 10:34am EDT  --  Report as abuse
Mott wrote:
It’s not the “lower oil output” it’s the fall in demand.

Nov 02, 2012 11:20am EDT  --  Report as abuse
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