Chevron showed again why it’s been top dog among U.S. oil giants this year. Third-quarter profit more than doubled at the $220-billion energy giant, justifying its share-price outperformance. Its domestic operations are relatively free of infrastructure constraints that have hit crude prices for others. The edge will fade, but Chevron is milking it for now.
To a large degree, earnings at oil producers slavishly track crude prices. That said, not all barrels are created equal. An inadequate ability to get much U.S.-produced crude to international markets hampers opportunities to take advantage of premium prices for Brent crude of around $18 (U.S.) a barrel. This markdown has been a drag for U.S. producers like Exxon Mobil and ConocoPhillips, even though they pump most of their crude overseas.
Chevron has been less affected. Largely through blind luck, it pumps more in areas less affected by transportation bottlenecks, so enjoys prices closer to those fetched on world markets. Per barrel its home brew fetched an average of $96.75 in the third quarter – a dollar more than Exxon extracted and an imposing $6 more than Conoco. This helps explain why its shares have outpaced peers’ over the past year, up 29 per cent compared with 24 per cent for Exxon and 22 per cent for Conoco.
Of course, Chevron has other pricing advantages over its rivals. It is the oiliest of the top three – a leg up at a time of languishing U.S. natural gas prices. With profits per barrel equivalent to around $28, Chevron is ahead of Exxon at $21 and leaves Conoco trailing on $17, according to Argus Research.
And Chevron’s U.S. price advantage won’t disappear overnight. Futures markets have the WTI discount roughly halving only by the end of 2013 as North America beefs up both pipelines and rail links to shift landlocked energy sources to market.
Investors currently price Chevron shares on a premium to free cash flow, at a multiple of 6.6 times against 5.2 for Exxon and Conoco, Argus Research calculates. Such an imposing lead suggests that while Chevron’s domestic price lead may ebb, its oily bias will deliver superior cash flow for some time to come. This lead may narrow, but looks unlikely to vanish any time soon.