Chevron hit with downgrade after Q2 miss, Hess deal setback

Chevron missed expectations in its second quarter, in part due to pressure from lower refining margins. Stewart Glickman, CFRA Research Energy Equity Analyst and Deputy Research Director joined Market Domination to discuss.

Chevron (CVX) saw revenue of $51.18 billion for the quarter, higher than expected. But the oil giant's adjusted earnings per share of $2.55 missed expectations of $2.93. Glickman described the print as "disappointing," and downgraded the shares to a Hold from a Buy.

Beyond the quarter, Chevron now faces a lengthy delay in its attempted acquisition of Hess (HES). Chevron saying in a securities filing that an arbitration case brought by rival ExxonMobil (XOM) could drag on well into 2025. Glickman noted that prolonged uncertainty was a factor in downgrading the stock, noting he and his team have "thrown in the towel" on the Chevron story.

Conversely, ExxonMobil had a stellar quarter with a beat on its top and bottom line. The company's production securing a big boost from its recent acquisition of Pioneer. Glickman raised his price target on ExxonMobil's stock, noting the oil giant has "a much better story to tell."

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This post was written by Kathleen Welch

Video Transcript

Shares of oil giants, Exxon Mobil and Chevron under some pressure today after both reported second quarter results before the bell.

Chevron's just earnings per share falling short of expectations while Exxon beating across the top and the bottom lines joining us now is Stuart Glickman CFR, a research energy equity analyst and deputy research director director Stuart.

It is great to see you.

Uh So let's let's dig into some of these names.

Uh Stuart, so Chevron uh just eps for Q two misses cash flow from operations 6.3.

Uh Stewart Street was closer to 8.9.

Curious to get your just initial reactions on that print.

What did you make of the report?

Yeah, I thought that the, the print today for Chevron was, was pretty underwhelming, disappointing.

Um You know, you have an expectation of close to three bucks in earnings and, and you come up with 255 and a lot of the weakness I would say is attributable to international upstream.

Uh for Chevron, they had some operational issues uh in Kazakhstan which weighed on them.

Uh And then on top of the print, now you've got uh the, the problem of, of prolonged uncertainty with related or related to the hes the hes transaction, which now it looks like the arbitration is not gonna happen until May.

Uh perhaps a decision, I would guess late 2025.

So investors really have to put up with a lot of headwinds to buy into the Chevron story.

Uh We've, we've kind of thrown in the towel here.

Uh We downgraded Chevron today to a hold from a buy and our new target price is 162 which is up marginally from where we are today, but not meaningfully, Stewart.

Do you see any reason to buy the stock before that deal if and before that deal closes?

So I Julie great question.

So I, I think the issue with Chevron is you have to presume that uh scenario analysis where Exxon prevails in arbitration, right?

And Chevron has already said they will walk away from the Hes deal if they don't get the crown jewel, which is Guyana.

Um So in that world, Chevron is, you know, arguably a little more gas focused than, than Exxon is certainly it has growth potential.

Uh From Kazakhstan, they have the concession until 2033 possible to extend beyond that.

Um And they have a yield of, you know, somewhere between four and 5% which is, which is reasonably attractive, but to be fair.

Um, you know, a lot of their other growth opportunities, for example, Deepwater Gulf of Mexico, those probably draw a lot more interest um from investors if oils back around $80.90 dollars and we seem to be slipping.

And I think that too is weighing on Chevron a little bit today.

And then another one on Chevron too, amidst all of this, the company says, oh, we're gonna relocate to Texas from California.

Is this, is this the right?

I mean, while all this is going on, right?

While they're under these pressures, while they're trying to figure out this deal is that the right time for them to be undergoing this type of a move.

Probably not.

I mean, they've been hinting at problems with California and telling folks look, this is not the easiest place to do business, particularly for refining with the environmental restrictions that California places on, on uh Refiners in the region.

Um uh you know, it was argued that this is about where their customers are located in Houston, but customers have been in Houston for a very long time.

I I think it has a lot more to do with politics.

And so to your point, um it's a bit of a high wire act to pull off a successful move of the, of the, of the, of the head orders to Houston while you also have all these other balls in the air.

It's it's not the best timing and Stuart get your thoughts on Exxon too.

So there uh reports they exceed profit expectations.

Um You know, the pioneer acquisition also, there's too, I know it's early days but out of the synergies, look there to you.

Yeah.

Uh in contrast to Chevron Exxon really has the way that it's backs right now, uh the pioneer transaction put a lot of incremental oil uh into Exxon's Coffers this quarter.

Um then you have of course their 45% stake in Guyana, which they already own, uh which is throwing off considerable um incremental oil, not just this year, but probably first oil, other other developments in the block in 2526 and 27.

Uh those are all likely to come to the fore.

So Exxon's got in my opinion, a much better story to tell.

Um and we still, we retained our buy opinion or four stars opinion on, on Exxon and raised our target price uh to 100 and 35.

I'm curious to, for Exxon, what you think the biggest risk is.

Um I mean, I think the the biggest risk for Exxon probably is really industry specific.

Um certainly they're about as, as well provisioned as one can be on a balance sheet.

Net debt to cap is, you know, around 6% or thereabouts.

Um but when oil prices suffer, everybody takes it on the chin uh including Exxon.

So I think that because, you know, a lot of the value that's being created is driven by upstream, uh your biggest risk is that oil goes south of $60 and everybody starts worrying about, you know, is the dividend gonna be preservable things like that?

Gotcha.

All right, Stewart.

Thank you so much for your perspective and analysis.

Appreciate it.

Thank you.