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Chevron 2Q Income, Output Down, Unocal Shows Gains

Chevron Corp., in a tug of war with the China Offshore Oil Co. (CNOOC) to take over asset-rich Unocal Corp., on Friday reported a drop of nearly 10% in 2Q2005 income, following lower earnings from its exploration and production (E&P) unit and its refining businesses. Worldwide, Chevron's oil and natural gas production also fell, with North American output down 15%.

Meanwhile, Unocal on Friday reported a sharp increase in quarterly profit, both on price and production strength. Both companies' earnings reports are being carefully watched, as Unocal shareholders ready for a vote on Chevron's proposed takeover bid on Aug. 10. A positive vote by shareholders for Chevron would effectively block CNOOC's higher offer.

Though the financial results were strong, Chevron's worldwide oil-equivalent production, including volumes produced from oil sands and production under an operating service agreement, declined 6% from 2Q2004. Most of the decline was associated with asset sales and cost-recovery provisions of some production agreements.

In the United States, E&P income increased 2% over a year ago, but net oil-equivalent production declined 15% to 740,000 boe/d. The U.S. net liquids component of production was down 12% to 470,000 bbl/d.

Chevron's net U.S. natural gas production took a huge hit, falling to 1.6 Bcf/d, a 19% decline from 2Q2004's 2 Bcf/d. For the first six months of the year, Chevron's U.S. gas output fell to 1.6 Bcf/d from 2.03 Bcf/d in 2004. U.S. gas sales, however, climbed, to 5.697 Bcf/d from 4.425 Bcf/d in 2Q2004.

Because of the lower oil and gas volumes in the quarter, Deutsche Bank analyst Paul Sankey said the report "reminds you of the big story (Unocal), as volumes are down 6% year-over-year...and capex is not greatly higher, indicating a lack of investment opportunities. The company is net cash $1 billion despite an $800 million buyback in the quarter, and if the Unocal bid fails, this will likely rise."

The San Ramon, CA-based major reported net income of $3.7 billion ($1.76/share), down from $4.1 billion ($1.94) in 2Q2004. Thomson First Call analysts had forecast earnings of $1.69/share. Revenue in 2Q2005 jumped 31% to $47 billion.

"Given the very low valuation of the stock, any positive surprise was as CVX needed this quarter, we think," said Credit Suisse First Boston analyst Mark Flannery in a note to clients. "This is not a blowout quarter, however, and bears will doubtless point out a relatively weak refining and marketing result against other large U.S. refiners."

For takeover target Unocal, earnings and production were both strong in the second quarter. The El Segundo, CA-based producer reported 2Q2005 net earnings of $475 million ($1.73/share), versus $341 million ($1.25) for the same period of 2004. Thomson First Call analysts were looking for $1.63/share, on average. Revenue jumped 19% to $2.21 billion.

Unocal credited higher liquids and gas production in Asia for lifting overall volumes nearly 14% to 459,000 boe/d. The Asian assets are considered the main reason both Chevron and CNOOC want the company. Unocal, however, cut its 2005 output estimate to about 430,000 boe/d from 440,000 because production will decline once the sale of its Canadian subsidiary Northrock to Pogo Producing Co. is completed.

In North America, Unocal's total net natural gas production was 525 MMcf/d, down from 594 MMcf/d in 2Q2004. U.S. production fell to 442 MMcf/d from 511 MMcf/d a year ago, while in Canada, gas production was flat at 83 MMcf/d. Total liquids production in North America was higher, to stand at 75 bbl/d, up from 70 bbl/d in 2Q2004.

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