Chevron’s Upstream and Downstream Segments

Chevron Corporation was established in 1906 and has its headquarters in San Ramon, the U.S. the corporation provides financial management, technology, and administrative services in the U.S. chemical and energy sectors. The operations on the corporation are categorized into downstream and upstream segments. The downstream segment deals with refining, marketing, and transporting crude oil and petroleum products. On the other hand, the upstream segment focuses on exploring, developing, and producing natural gas and crude oil, liquefying, transporting and regasification of natural gas. The difference between upstream and downstream segment is that the former focus on international transportation of crude oil, petroleum products, and natural gases while the latter focus on activities that take place within a country’s jurisdiction.

The volatile nature of the crude oil and petroleum products have a direct impact on the fluctuation of Chevron’s stock value in the market. This study examines the behavior and performance of the corporation’s stock performance over different timeframes. Likewise, the causes of changes in stock price as well as their impact on Chevron’s profitability will also be examined.

The table below shows the changes on the Chevron’s stocks price between October 2017 and October 2018 presented on a monthly basis.

The information in the table above shows the fluctuation of Chevron’s share price over the specified period. The percentage changes of the company’s share price were calculated using October 2017 as a base month. The analysis shows that the share price increased between November 2017 and January 2018 by 2.74%, 8.1%, and 8.23% respectively. However, in February and March 2018, the share price decreased by -1.91% and -1.54% respectively. The stock value registered to fluctuate positive percentages between April and October 2018. During the period, the company’s recorded the highest share price of $126.43 which is equivalent to an increase of 9.16%. On the other hand, Chevron recorded the lowest share price of $113.61 which is equivalent to a decrease of 1.91% compared to $115.82 recorded at the end of October 2017.

During the last quarter of 2017, Chevron posted a profit of $3.4 billion which is equivalent to $1.64 per share. However, after deducting tax benefit worth $ 2 billion, the company posted a profit of 72 cents per share. The price of its shares increased by approximately $10. Financial analysts have stated that the positive performance of Chevron’s stock can be attributed to a favorable business environment. Chevron has become a darling to income seekers who seek to increase their investment portfolio. For instance, in 2017, Chevron increased dividend per share by 3.7% (Statistica, 2018).

Chevron’s Stock Performance

Cash flow per Share refers to a company’s free cash flow relative to its outstanding stock. Cash flow per share is obtained by dividing operating cash flow by the outstanding shares (Koller, 2010). Cash Flow per Share presents a clear picture of a company’s ability to generate earnings from its operations. The table below shows Chevron’s cash flow per Share between 2014 and 2017.

The information in the table above shows the fluctuation of Chevron’s cash flow per share over the specified period. The changes of the company’s cash flow per share were calculated using 2013 as the base year. The analysis shows that the free cash flow per share price decreased during the four year period. The company recorded the highest cash flow per share of $16.71 in 2014 besides 2013. However, the lowest cash flow per share was 6.86 in 2016. Negative changes in cash flow per share of -1.41, -7.80, -11.26, and -7.30 respectively was recorded between 2014 and 2017 (Hey, 2017).

The fall in the price of oil and gas commodities have been cited as the primary contributor in the fall of the company’s operating cash flow per share. Chevron’s total sales reduced from $51 billion in 2014 to $32 billion in 2015. Cash flow from the company’s operations was impacted by the reduction of sales leading to a reduction from $31.465 billion in 2014 to $19.456 billion in 2015 (DiLallo, 2018).

Chevron generates income from its downstream and upstream market segments located in the U.S and internationally. In the second quarter of 2018, Chevron generated a total of $4.1 billion from its operations. $ 1.495 billion representing 36.17% came from its operations in the U.S while $2.638 billion, representing 63.38%, came from its international operations (OFX, 2018).

1. Upstream segment:  Revenues realized from the segment stood at $ 838 million compared to a loss of $102 million during the same period in 2017. The improvement was attributed to a reduction of impairment charges, higher realizations, increased production of crude oil and the decision to offset underperforming assets. Lastly, the company’s selling price of a barrel of natural gas and crude oil increased from $ 41 in 2017 to $59 in 2018(Best, 2013).
2. Downstream segment: Revenues realized from the segment stood at $ 657 million compared to $634 million during the same period in 2017. Reduced tax expenses caused the increased, increased margin of refined products sold, and partially offsetting assets associated with high operating expenses(Ramon, 2018).

1. Upstream segment: Revenues realized from the segment stood at $ 2.46 billion compared to $955 million during the same period in 2017. The increase in revenue was caused by the higher realization of natural gas and crude oil, increased sale volume and favorable foreign currency rates on Chevron’s earnings. The price of a barrel in the international market increased from $45 in 2017 to $68 in 2018(English, 2011).
2. Downstream segment: Revenues realized from the segment stood at $ 181 million compared to $ 561 million during the same period in 2017. The decreased in revenue was as a result of a reduced margin of refined products sold, the negative effects of stock and higher operating expenses. However, foreign currency exchange rates remained favorable during the period(Sander, 2017).
3. US dollar strengthen/weaken exchange rates over the last 12 monthsversus Euro and Pound.

The performance of the U.S dollar against the Euro and British Pound has been summarized as shown in the graph below;

• US dollar against Euro: In the last one year, the exchange rate of the U.S Dollar against Euro ranged between 1.15 and 1.23. The dollar was most robust against euro in October 2018 and weakest against Euro in February to April of 2018. The analysis shows that the dollar has remained stronger against Euro in 2018
• US dollar against British Sterling: In the last one year, the exchange rate of the U.S Dollar against British pound ranged between 1.29 and 1.41. The dollar was strongest against the pound in August 2018 and weakest against British in April of 2018. The analysis shows that the dollar has remained stronger against Pound in 2018

In the last quarter of 2017, the performance of the U.S dollar against other international currencies signified fading of the country’s economy. The International Monetary Fund (IMF) downgraded the performance of the U.S economy from 2.5% to 2.1%. However, the exchange rate analysis in 2018 shows that the economy is rebounding back. Following the decision by President Donald Trump to reduce corporate tax from 35% to 20%, the U.S companies and citizens are repatriating funds that had been held in foreign economies. The move has increased the demand for US dollar, increased domestic investment which in return boost economic growth. The U.S dollar is expected to strengthen further against the Euro and the British pound.

Chevron’s Cash Flow Per Share

Exchange exposures are categorized into the transaction, economic and translation. First, Chevron is exposed to transaction exchange risks whenever it engages in a contract whose cash flows are likely to be affected by exchange rates from foreign currencies. For example, Chevron has to exchange the cash flow realized from foreign trades into domestic currency (the U.S dollar). Chevron engages in negotiating contracts with its international partners. The negotiations entail setting delivery dates and prices. With the volatility in the foreign exchange markets, the rates keep on changing which exposes the company to transaction risks between US dollar and other foreign currencies (Statistica, 2018).  

Second, economic exposure arises from the degree at which normal fluctuations in the foreign currencies influence a firm’s value. Economic exposure influences Chevron’s value and future cash flows relative to its competitors. For example, when exchange the U.S dollar becomes stronger against the Euro, the demand in the EU petroleum product market is likely to drop. And third, fluctuation of foreign exchange rates also causes exposure to translation risks. Translation risks arise when Chevron has to consolidate different financial reporting from its subsidiary firms into one. Translation risks might lead to reduced cash flows, earnings, and share prices (Statistica, 2018).

There are two methods used by the Chevron to manage exchange rate risks. First, the management uses the hedging technique to manage its foreign exchange risks. Hedging refers to setting a certain position of the currency which would then be used to offset gains and losses associated with exposures from exchange rates. Chevron uses hedging to lock the value of the U.S dollar which protects it from changes in the foreign exchange rate. Second, Chevron uses financial management methods such as matching, asset or liability management, pricing decisions, netting and lagging/ leading to prevent or reduce foreign exchange risk exposures (Ogier, 2012).

The weighted average cost of capital (WACC) refers to the average rate a company is required to pay for funds used to finance its investments/ assets (English, 2011).

WACC is calculated using the formula below;

1. Weights (E + D):

The value of Chevron’s equity in the market stood at $223,959.27 million while the value of its debt stood at $42,444.5 million giving a total of $266,403.77 million.

The weight of equity =0.84

The weight of debt = 0.16

1. Cost of Equity=Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market – Risk-Free Rate of Return). Based on a 10 year treasury bond, the risk free rate of return is 3.16%, Chevron’s beta is 1.04 while the required market premium is 7%.

Cost of Equity= 3.16% +1.04 *7% =10.44%.

1. Cost of Debt is obtained dividing a company’s interest expense by its debts (book value). Chevron’s interest expense was $307 million at the end of 2017 while its debts book value was $42444.5 million. Therefore, cost of debt =307 / 42444.5 = 0.7233%.
2. Chevron’s cost of capital (WACC) =E / (E + D)*Cost of Equity+ D / (E + D)* Cost of Debt* (1 – Tax Rate).

=0.84*10.44%+0.16*0.7233 %*( 1 – 0.2)

WACC = 8.29 %

Therefore, Chevron’s cost of capital is estimated to be 8.29%

1. Causes the Chevron’s stock price to change from October 2017-October 2018

Exchange Exposures

Several factors cause the fluctuation of Chevron share price. First, with the stability of the oil price in the market, Chevron’s earnings rose. Instead of increasing the dividends payable to investors, the company increased its investment in long term investment programs which caused a reduction in its cash flows. The share price of Chevron’s stock is expected to increase with the maturity of the long term projects (Chevron Corp, 2018).

Second, the company invested in expensive upstream projects in riskier areas such as Angola, Canada, and Australia. With the fall of global oil price, the returns from such projects were disappointing which led investors to lose confidence in the company. Reduces confidence by investors led to reduced investment hence poor performance in the market. Third, the price of natural gas did not improve as expected to force Chevron to write down its assets in this sector partially (Chevron Corp, 2018).

However, the reduction of corporate tax by the U.S government from 35% to 20% is likely to reduce the operating expenses for Chevron and other corporates in the sector. The impact is already being felt in the U.S oil sector. Since the beginning of 2018, Chevron has been posting favorable share price. The stock value has become generally stable. Therefore, changes in Chevron’s share price was caused by the fluctuation of oil prices, long term investment and the reduction of corporate tax (Carson-Dellosa Publishing Company, 2018).

References

Best, J. W. (2013). High-Powered Investing All-in-One For Dummies. New York: John Wiley & Sons.

Bierman, H., & Smidt, S. (2014). Advanced Capital Budgeting: Refinements in the Economic Analysis of Investment Projects. New York: Routledge.

Carson-Dellosa Publishing Company, I. (2018). Chevron Record Book. California: Carson Dellosa Publishing Company Incorporated.

Chevron Corp. (2018, 10 17). Publications. Retrieved from Chevron publications: https://www.chevron.com/media/publications

DiLallo, M. (2018, May 7). Why Chevron Corporation’s Stock Slid 10.9% in February. Retrieved from The Motley Fool: https://www.fool.com/investing/2018/03/07/why-chevron-corporations-stock-slid-109-in-februar.aspx

English, P. (2011). Capital Budgeting Valuation: Financial Analysis for Today’s Investment Projects (1 ed.). New York: John Wiley & Sons.

Hey, R. B. (2017). Performance Management for the Oil, Gas, and Process Industries: A Systems Approach. New York: Elsevier Science.

Jones, H. (2018, Jan 3). Which currency will come out on top in 2018? Retrieved from The National: https://www.thenational.ae/business/money/which-currency-will-come-out-on-top-in-2018-1.692468

Koller, T. (2010). Valuation: Measuring and Managing the Value of Companies. New York: John Wiley & Sons.

OFX. (2018, 10 17). Monthly Average Rates. Retrieved from OFX: https://www.ofx.com/en-au/forex-news/historical-exchange-rates/monthly-average-rates/

Ogier, T. (2012). The Real Cost of Capital: A Business Field Guide to Better Financial Decisions. London: Pearson.

Ramon, S. (2018, July 27). Chevron Reports Second Quarter Net Income of $3.4 Billion. Retrieved from Financial Times: https://markets.ft.com/data/announce/detail?dockey=600-201807270830BIZWIRE_USPRX____BW5089-1

Sander, P. (2017). The 100 Best Stocks to Buy in 2018. New York: Simon and Schuster.

Statistica. (2018, 10 17). Euro (EUR) to U.S. dollar (USD) monthly exchange rate from September 2016 to September 2018. Retrieved from The Statistics Portal: https://www.statista.com/statistics/438061/euro-to-us-dollar-monthly-exchange-rate/