Undervalued Chevron's Troubles Weaken Earnings

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Chevron Corp. (NYSE: CVX) has hit quite a few speed bumps lately that are negatively affecting its stock. As it maneuvers through legal and financial issues, its stock will continue to be under pressure in the near future. However, there are some positives relating to its fundamentals that continue to separate it from its peers.

This week has been particularly difficult for the stock, as investors reacted to the company announcing that its third quarter earnings will be lower than expected. Already, investors were digesting legal developments over the company’s refineries and oil drilling projects.

Specifically, the company released an interim update noting that its earnings for the third quarter of 2012 will be “substantially lower than they were last quarter. This is based on happenings during July and August.

Adding insult to injury was a cut to its earnings per share for the third quarter by UBS. It lowered its estimate to $2.83 from $3.22, citing "significant" negative foreign exchange impact, lower-than-expected production, lower liquids realizations and higher corporate expenses.

Chevron cited a bevy of reasons for the expected earnings decline for the third quarter. Look no further than the gas mania plaguing California now to find one of those reasons. In August, there was a fire at Chevron’s refinery in Richmond, Calif. It forced the company to shutdown the crude unit there, which created a supply issue and sent gas prices soaring to record highs in the Golden State.

The market is now learning that the refinery may not be back in commission until next year. This could further pressure the company’s earnings through the fourth quarter, and even beyond.

Then there was Hurricane Isaac, which hit the Gulf Coast at the end of August. It also forced the shutdown of one of Chevron’s refineries, with this one being in Mississippi. Chevron says it will also remain offline through the fourth quarter of this year.

While both events contributed to a drop in the number of barrels of oil the company was able to produce, Chevron noted that Hurricane Isaac was the biggest culprit. Specifically, Chevron said that production fell by 19,000 barrels a day during the first two months of the third quarter. Realized prices that Chevron paid for a barrel of crude fell to $95.44 in July in August. During the second quarter, the price was $99.21.

As the company recovers from these refinery shutdowns, it is also mulling its options in how to deal with an $18.2 billion judgment it has been ordered to pay.

On Tuesday, the U.S. Supreme Court declined to review the petition Chevron submitted over the judgment. It stems from Chevron’s acquisition of Texaco in 2001. People residing in Ecuador’s Amazon region say Texaco contaminated the area, and sued to recover damages. Chevron says the claims are fraudulent. Specifics about what Chevron’s next move will be in this legal matter weren’t revealed at the time of writing.

In another legal matter, Chevron late last month agreed to pay a $17.3 million fine for its role in the oil spill off the coast of Rio de Janeiro, Brazil. Chevron also agreed to implement process improvements based on lessons learned from the spill that is estimated to have dumped 155,000 gallons of oil in that area. The Brazilian court overseeing the matter has limited Chevron’s work in the area, which could also affect earnings.

All of these events are naturally impacting the stock. At the time of writing on Wednesday, Chevron was trading around $112. This was well off the $117.56 it closed at on Tuesday before it released it interim earnings report. During intraday trading on Thursday, the stock had rebounded a bit, trading around $113.

In Chevron’s favor is its dividend payout. When compared to its peers – BP (NYSE: BP) and ExxonMobile (NYSE: XOM) – Chevron’s is the strongest. It is $3.60, yielding 3.1%. Exxon pays $2.28, yielding 2.5% and BP pays $1.92, yielding 4.5%.

Chevron has long been considered undervalued compared to its peers. For example, its forward P/E ratio is 9.4 times compared to Exxon’s forward P/E ratio of 11.4 times. Another fundamental that I want to point out is Chevron’s return on assets. As of the end of the second quarter, it was 12.69%, outpaced only by Exxon, whose ROA was 13.62%.

Chevron reports its full quarterly results on Nov. 2, which should give us a clearer view of how all of these recent developments have affected the company’s earnings.



TwillyD has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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