Chevron Corporation (NYSE:CVX): Tough Times Ahead

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Just like most of the other companies, Chevron Corporation (NYSE:CVX) is facing the heat due to a volatile market environment. The stock has lost more than 12% year-to-date. The California-based oil company has managed to grow revenues while improving its cash flows. But analysts fear that this growth might come to a halt amid the latest dip in oil prices. Chevron Corporation (NYSE:CVX) focuses more on liquid fuel. That is why the company is very vulnerable to the declining oil prices. In the first quarter, Chevron’s total production mix comprised of 64% liquids.

Chevron’s Reliance on Crude Prices

In the first quarter of 2017, Chevron Corporation (NYSE:CVX) revenue increased for the fourth time on sequential basis to $31.36 billion. The company also swung to a profit of $1.42 per share, from a loss of $0.39 per reported in the same quarter last year. Chevron Corporation (NYSE:CVX) cash flow in the period increased to $3.88 billion from $1.14 billion on year-over-year basis. At the end of the first quarter, Chevron’s cash flow was $564 million. But most of these gains were on the back of a recovery in oil prices in the fourth quarter of 2016.

On Tuesday, oil price tumbled to about $43 per barrel despite of the news suggesting shrinking US oil inventories and possible production curbs on Libya and Nigeria. Experts think that oil prices could push higher after the July 24th, meeting of OPEC in which the major oil producers are expected to pressurize Libya and Nigeria to cut their oil production. Libya and Nigeria are members of OPEC but currently enjoy an exemption from production cuts.

Last week, a US Energy Information Administration report said that US oil production increased by 1% to 9.34 million barrels per day during the week ended June 30th. Another report by S&P Global said that oil production by OPEC countries increased to 32.49 million barrels in June, which is an increase of 500,000 barrels per day. These trends suggest that Chevron Corporation (NYSE:CVX) might face a tough time in the future as there is a bleak chance of oil recovery.

Chevron Corporation (NYSE:CVX) plans to reduce its capital expenditure to $19.8 billion in 2017, compared to $22.43 billion last year. Excluding equity affiliates, the CapEx is forecasted to drop to $15.1 billion this year from $18.11 billion in 2016 . In order to break even, the company will have to increase its free cash flow by 17.5% from last year. This growth is only possible if oil prices stablize at $55 a barrel in 2017, which is almost impossible. Bernstein Research recently slashed its estimate for oil price in 2017 to $50 from $60.

Earlier this month, investment firm RBC praised Chevron Corporation (NYSE:CVX) business model, and said that the company has “many attractions for investors” and has a “healthy” balance sheet and strong cash margins. However, the firm gave an Underperform rating to the stock, because it sees potential downside estimates in 2017 and 2018. The report also said that Chevron’s premium relative rating is at risk.