Chevron Earnings: Weaker-Than-Expected Results, TCO Delays Weigh on Shares, but Outlook Unchanged

Chevron’s CVX third-quarter earnings not only fell below market expectations, but management also announced a further delay and cost increase to its two major projects at its TCO asset in Kazakhstan. Both the Wellhead Pressure Management Project and Future Growth Project will start about six months later than previously expected, in first-half 2024 and first-half 2025, respectively, while the projects’ total costs will be 3%-5% higher than expected. Production in 2024 will be lower than in 2023 because of heavier turnarounds as well. Finally, TCO cash flow will be about $1 billion lower in 2025 than previous guidance, given lower volumes from the project delays. The combined news of weaker-than-expected earnings and delays to Chevron’s major projects sent shares lower. However, we think the selloff (about $17 billion in lost market cap) is short-sighted and largely an overreaction.

We plan to incorporate the update into our model but do not expect a material change to our $172 fair value estimate or narrow moat rating. Although the projects have been plagued by issues, including having to make special accommodations to continue work through the pandemic, the long-term economics seem intact. As does Chevron’s overall competitive position with continued Permian growth and now the addition of Guyana with the Hess acquisition that supports its long-term growth outlook. Including today’s selloff, shares are trading about 15% below our fair value estimate.

Adjusted earnings fell to $5.7 billion from $10.8 billion a year before due to lower upstream price realizations and weaker global refining margins. Production increased to 3,146 thousand barrels of oil equivalent per day from 3,027 mboe/d the year before due largely to the acquisition of PDC Energy and continued growth in the Permian.