Chevron Adjusting Downward

After the market close yesterday (Thursday), Chevron (CVX) provided a weaker-than-expected preliminary update for the fourth quarter of 2008. The update, which covers the first two months of the quarter, provides for below-guidance production of crude oil and natural gas and price realizations that are below benchmark levels.

Realized margins in the downstream business were in line with benchmark levels, while throughput levels were as per guidance. The company also indicated that write-offs and other corporate items for the quarter will be higher than the previous guidance.

On the whole, the update will result in downward adjustment for quarterly earnings for Chevron and set up the stage for what to expect from the other major integrated oil companies like Exxon (XOM) and ConocoPhillips (COP) in year-end results. Chevron reports fourth quarter results on January 30, 2009.

Here are the details of the update:

In the core upstream business, Chevron indicated that production for the first 2 months averaged approximately 2.53 million oil-equivalent barrels per day (BOE/d), below the company’s guidance of 2.6 million BOE/d. If upstream volumes stayed at that rate through December as well, then fourth-quarter oil and gas production would be up 3.5% sequentially, but down 3.2% from the year-earlier level.

Production was affected by the lingering effects of the September hurricanes in the Gulf of Mexico offseting international growth. Bright spots internationally remain the ramp up at the new Agbami field offshore Nigeria and completion of the expansion work at the Tengiz field in Kazakhstan.

Chevron’s domestic crude oil realization averaged $61.70 per barrel for the first two months of the quarter, down 45% sequentially and 24.4% year over year. The company’s U.S. crude oil realization was almost 10% below the average spot benchmark price.

Internationally, the company’s crude oil realization averaged $53.29 per barrel, down 48.1% sequentially and 33.7% year over year. International realizations missed average Brent spot prices by approximately 15%.

Given the continued slide in benchmark crude oil prices through December, Chevron’s quarterly average crude oil realization will be even lower than this update. Domestic natural gas realization was also below the previous and year-earlier levels, though international realizations improved.

In the refining business, indicator margins (meaning overall market margins) for the quarter averaged $15.29 per barrel in the core U.S. West Coast region (Chevron is the dominant player in that region), down 23.7% sequentially and 32% year over year. In the international markets, benchmark margins in Singapore (Chevron has a heavy presence in the Asia-Pacific region) averaged $4.55 per barrel, down 34% sequentially and 38% year over year.

The refining weakness is expected to be partly offset by marketing gains, which were up both sequentially as well as year-over-year worldwide. Total refinery runs at 1.9 million barrels per day are inline with guidance, reflecting the resumption of normal operations are Pascagoula, Mississippi, and planned downtime at units in Thailand and South Korea. The company indicated downstream earnings would include sizable gains from provisionally priced crudes and derivatives due to the falling commodity prices.

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