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ChevronTexaco's Continuing Decline in Domestic Production Concerns Analysts

In a 1Q2005 interim update issued last week, ChevronTexaco Corp. said its U.S. liquids and natural gas production fell 1.5% from fourth quarter 2004 levels on normal field declines, operational factors and asset sales, which offset gradual restoration of volumes that were shut in last September during Hurricane Ivan.

The report, which cited lower refinery margins and less natural gas production in the United States, prompted several analysts to question the 1Q and full-year 2005 expected earnings of the oil major.

Total daily domestic production was down 19% compared with 1Q2004. Natural gas production volumes were off sharply when compared with levels for the same period a year ago. Looking at year-ago levels, domestic gas production was down about 23% to 1.594 Bcf/d through February from 1Q2004 levels of 2.061 Bcf/d. ChevronTexaco's domestic gas production in the fourth quarter of 2004 was 1.618 Bcf/d.

Net liquids production in the U.S. was 448,000 bbl/d through February, down only 1.3% from the fourth quarter but off 16% compared with 1Q2004. Net boe production in the United States through February was 713,000 boe/d, down 1.5% from 4Q levels but off 19% from levels in 1Q2004.

For the full 1Q2005, ChevronTexaco said volumes still shut in because of Ivan are expected to average about 40,000 boe/d, compared with an impact of about 60,000 boe/d in 4Q2004. The company's Petronius platform in the Gulf of Mexico restarted production in early March.

"For the full-year 2005, we are reiterating our guidance of roughly 6% annual oil and gas production volume decrease in the U.S., excluding the effects of asset sales and storms," the company said in a statement.

Aggregate international liquids and gas production volumes in the interim quarter were unchanged, the company noted. Full-year 2005 worldwide before exploration expense is expected to be about 15% above last year's total of $700 million, "in part reflecting increased activity as we follow up on recent exploration successes."

Excluding the company's equity share in Dynegy Inc.'s results, ChevronTexaco said it expects to average in the range of $160-200 million/quarter after-tax charges, and "we currently estimate that full first quarter net charges will be higher than this range. Going forward, we expect fewer favorable corporate-level tax items than we've experienced in recent quarters..."

ChevronTexaco also warned that downtime at its three major U.S. refineries would significantly affect refining margins. It also said that gasoline margins had dropped sharply in the West.

Following the report, three major financial firms expressed their concern.

"Brutal downstream earnings guidance was the single biggest negative in a ChevronTexaco interim update that contained a number of nasty-looking items," said Deutsche Bank's Paul Sankey in a research note.

Deutsche Bank cut the 1Q earnings forecast for ChevronTexaco by 14% to $1.21/share and its full-year 2005 estimate by 9% to $4.93/share.

J.P. Morgan also cut its 1Q quarterly full-year earnings forecast on lower oil and gas production along with higher exploration and other expenses. Its forecast was cut to $1.21/ share from a previous forecast of $1.29 and its 2005 estimate to $4.86/share from $5.23.

Credit Suisse First Boston (CSFB) said it would revise first quarter estimates at the end of the quarter. "The item that draws the biggest attention to us is the very low U.S. West Coast motor marketing margin -- a relatively important business for CVX relative to its peers," CSFB wrote. In the upstream, U.S. production volumes also appeared to be lower than expectations, particularly on the natural gas side.

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