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Why Chevron Is Set For More Gains

Summary

Chevron has started witnessing an improvement in the upstream business as a result of better oil pricing, which has allowed it to improve realizations and reduce losses sequentially.

Chevron’s price realizations will continue improving as the oil price environment has improved further in the third quarter and the trend will continue due to an improving demand-supply balance.

Chevron can take advantage of better pricing due to its focus on areas with low costs such as the Permian Basin, where its development costs are in the single digits.

Chevron’s production in the Permian Basin is increasing due to the deployment of longer laterals and more frac stages, while costs are dropping at the same time.

The weakness in both the downstream and the upstream businesses has taken a heavy toll on Chevron's (NYSE:CVX) financial performance of late, but the stock's performance on the market has remained strong. In fact, Chevron shares are up over 12% this year even though the company posted a huge loss of $1.47 billion last quarter as against a gain of $570 million in the prior-year period.

A key contributor to this huge decline in Chevron's earnings was a $1.4 billion drop in the company's crude oil price realization in the upstream segment. However, the good news is that Chevron has started witnessing a turnaround in the upstream segment. I am saying this because on a sequential basis, Chevron's upstream realizations had actually improved by $885 million, as shown in the chart given below:

Source: Chevron

This improvement in Chevron's upstream business on a sequential basis last quarter was a result of higher average realized prices of oil. More specifically, Chevron's average realized price per barrel of oil equivalent in the second quarter of the year stood at $36, up from $26/barrel in the first quarter of the...


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