Chevron: Will the Drop in the Price of Oil Hurt Earnings?

By: Dennis Biray
Submitted: 2007-01-17 16:17:34
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As Chevron (CVX) will report earnings this week, you may be wondering if it will be beneficial to purchase shares of this company in attempt of earning higher capital gains. You may also be wondering why I am endorsing the purchase of this equity at a time when oil prices are at its lowest point for this year. While such is a valid claim, there is a more profound reason to the success that Chevron will post this week which will surprise many investors throughout Wall Street.

Since the stock market naturally is a rational expectations market, the information consumed by investors stays recent and continuously changes on a day to day basis. Many of these investors are always trying to look in foresight to how equities could potentially react to certain changes in the economy. While such is typically an insightful proposal, in the case of Chevron, many of these investors should have a clear sense of hindsight before making hasty predictions. When looking at Chevron, its previous operational results were reported a few months ago in late July. However, the actual 2nd quarter finished June 30th which surprisingly should have more implications than usually thought of.

Through that one month period between the quarter’s end and the results posted by Chevron, the oil market went through unprecedented territory reaching record highs of almost 80 dollars per barrel. While of course in the recent months oil has fallen dramatically by 25%, such an incredible value should remain in investors mind when thinking of purchasing the stock. The reason I say this can relate back to my premise of how the rational expectations market of the stock market may fool some individuals who impatiently focus completely on future news. Such sentiments sometimes have negative implications as for the 3rd quarter many Wall Street analysts have predicted an EPS estimate of 2.02 for this oil giant. While such a number may sound normal or foreign relative to what it should be, I believe such a number is greatly undervalued because of the foresight of impatient analysts. Using supportive material of only recent weeks in terms of how the oil market has performed, more than likely analysts worried over such a drop and failed to notice the record highs just three months ago and undervalue this estimate. The same can be said three months prior when analysts overvalued the EPS estimate of Chevron because of the recent events which coupled with a miss in terms of expectations for this company and immediate falling numbers. Thus if such a trend continues, it should be no surprise this Friday when Chevron posts the bottom line number way above most everyone’s expectations.

As you read that last paragraph, you may say to yourself about the effects currently happening now will bring to the next quarter results for Chevron. While such is a valid concern, think about the upcoming months. Many predictions have indicated that a milder than normal winter would be approaching. However, with snow reaching places about a month or two earlier than normal coupled with the fact the OPEC will continue to cut inventory, do not expect a significant further decrease in the price of oil anytime soon. As prices have reach their more than likely lowest point, the only way they can move now is up, and more than likely they will be up in a matter of weeks which should have a positive effect on oil companies such as Chevron. As I say this, you may be thinking that I am contradicting myself as I am looking into foresight instead of examining what has been put in front of me. However, the reasoning here is that prices have reached their lowest point of the year and won’t decrease any further. However, unlike the previous quarter’s situation where prices went from incredibly high to incredibly low, I believe this quarter there will be a much smaller margin of difference between high and low prices this upcoming quarter which should position analyst earnings to be a better representation of how Chevron will perform. If such analysis is still to risky to believe, just think of the fact that it is inevitable, with shrinking supplies, that oil prices will increase in the future complimented with the fact that Chevron is a respectable name which has grown at a steady but encouraging rate since its IPO days.

Thus, with the obvious spectacular fundamentals coupled with such EPS analysis, look for shares of Chevron to produce some positive and surprising feedback from Wall Street this week. As in most cases, predicting the future and examining the present is what will bring success. In the case of Chevron, having a clear representation of hindsight should reap more benefits than both the present and future combined.

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