Chevron Corp. sowed a second consecutive quarterly profit in the last three months of 2016 following sharp cost containment and a modest price rebound, but earnings still came in well below Wall Street consensus.

Net profits totaled $415 million (22 cents/share) in 4Q2016, versus a year-ago loss of $588 million (minus 31 cents). Sales and other operating revenues were $30 billion in the final quarter, compared with $28 billion in the year-ago period. The Street’s consensus was earnings of 64 cents/share on revenue of $33.3 billion.

Improved earnings and balanced cash flow should be the hallmarks of 2017 as more belt-tightening and production growth pad revenue, CEO John Watson said during a conference call Friday morning.

“Our 2016 earnings reflect the low oil and gas prices we saw during the year,” he said. “We responded aggressively to those conditions, cutting capital and operating expenses by $14 billion,” allowing capital expenses to decline by more than expected.

Upstream earnings totaled $930 million, compared with a loss of $1.36 million a year ago. U.S. upstream profits totaled $121 million from a loss of $1.95 billion in 4Q2015. For 2016, Chevron swung to a $497 million (minus 27 cents/share) loss from 2015 profits of $4.59 billion ($2.46).

Cash flow from operations totaled $12.8 billion in 2016, versus $19.5 billion in 2015. Capital and exploratory expenditures fell to $22.4 billion last year from $34 billion in 2015. Nowhere are the efficiency gains more apparent than in the drilling program, where the “trend of spend” is down, Watson said.

”Trend of Spend Is Down’

For example, for the wells drilled in the deepwater Gulf of Mexico (GOM) last year, “if we had had the productivity we had in 2014, we would have spent $1 billion more…and that was just in the deepwater. So the efficiencies we’ve put in place have allowed us to bring down costs. The trend of spend is down…We have some major capital projects that are being completed. If we’re still in the $50-55/bbl world, you’ll see us tracking at the bottom-end of that range…

“Notably, I would expect that we would see an increase in unconventional spending,” led in the U.S. onshore by the Permian Basin.

“We’ve talked about ramping up the Permian, and I think that will be the case,” the CEO said. “We’re budgeting about $2 billion this year, but you could easily see another $1 billion there. We have very little activity in the Marcellus Shale now…We have gotten very efficient there, but we would expect better market conditions and offtake capability there. We’ve made good progress in the Duvernay” in Canada and in Argentina. “Just in the shale and tight area, you could see some increases…That’s short-cycle high-return activity.”

In the Permian, for example, plans this year are to add about one rig every two months to the current 15-rig fleet (10 operated), to end 2017 at around 15 operated rigs. Capital spending in the Permian is set at around $2 billion for 2017. More details are expected during an investor conference in March.

Opportunities also exist in the portfolio to progress concepts and delineation drilling at projects in the GOM and overseas.

“We have a good queue of projects, but we need to make sure that those have kind of the right economics associated with them,” Watson said. “But all of that can comfortably fit in the range that we’ve talked about…”

Global supply across the board, not specifically to Chevron, has remained stable, despite the falling rig count and reduced spending, which was not anticipated.

“I have been surprised at how resilient production has been in many locations around the world,” Watson said. “Some of that is, we just keep getting better…We’ve been on plateau in some of our Gulf of Mexico projects, and I think we and others are getting very good at extending plateaus. And technology only goes in one direction. We hear about it in the context of the shales, but the same thing is true in other conventional activities…It’s made some of…base activity more competitive.

“Ultimately, however, you do need new major capital projects to fill the gap if you look out a few years. And we’re just not seeing final investment decisions being taken on significant new greenfield opportunities…At some point, we do…expect to see, at least in the conventional area, some declines in production. And there’s a limit to this, and it has surprised us that it’s held up as well as it has. But at some point, you’re going to need new activity.”

Trump Agenda Encouraging

During the question and answer period, Watson was asked about the changes undertaken since President Trump took office. He was asked about the president’s agenda, and specifically about the GOP-backed border tax adjustment plan, part of a proposed corporate tax reform, which would adjust taxes by subsidizing exports and taxing imports.

“In an overall sense, I’ve been very pleased with the agenda that the Trump administration has,” Watson said. “We have seen an avalanche of regulation over the last decade, and putting a much more balanced cost benefit framework in place to assess the value of those regulations, freeing up infrastructure pipelines — all of that is quite positive for our business, for the country, job creation and a lot of things. So that is very much a positive.

“And we all know that our tax system is not competitive. We want American companies to be able to compete, and so there’s a lot of work being done to try to bring down corporate rates so that we can compete both at home and abroad for capital. And of course, the administration has a focus on bringing jobs and capital back to the U.S., and lower rates will help that.”

In Watson’s view, the administration is looking for “ways to make those lower rates happen, and so they’re looking at a variety of different concepts. The truth is, there are a lot of different ideas being floated right now, and I think they’re looking for input. And we’ll continue to provide it. President Trump has indicated that the border adjustment concept is complex, and I would agree with that…I think we need to take a close look at perhaps the consequences of that, both some that could be positive and the unintended consequences in terms of impact on consumers, exchange rates and knock-on effects on the global economy.”

Watson said he has “no doubt that the administration will do a good job of doing that and will settle on the right kind of tax reform at the end of the day. I think we need to have a little patience for the different ideas that are being put out there, and hopefully we’ll get to the right outcome.”

Chevron last year had “noteworthy milestones,” and Watson highlighted ramping up production from Gorgon, the first of two major liquefied natural gas (LNG) export facilities in Australia that Chevron operates. The other operated Australian LNG project is Wheatstone.

About 900 million boe of proved reserves were added last year, equal to 95% of net boe, with the “largest additions” from the Permian, Wheatstone and a planned project at the Tengiz field in Kazakhstan.

Worldwide net oil and gas production reached 2.67 million boe/d in 4Q2016, essentially flat year/year. For the year, output was 2.59 million boe/d, down 1%. In the United States, production totaled 682,000 boe/d in the final three months, off 5%, or 37,000 boe/d, from 4Q2015.

Production increases from base business in the GOM, as well as shale and tight properties in the Permian, were offset by the impact of asset sales of 58,000 boe/d and normal field declines. The net liquids component of U.S. output increased 2% to 508,000 boe/d, while net natural gas production decreased 21% to 1.04 Bcf/d.

NGI is covering many North American-focused oil and gas operator results over the coming weeks. A calendar listing is available on the website.