For Immediate Release
Chicago, IL – November 1, 2010 – Zacks.com Analyst Blog features: Chevron Corporation (CVX), ExxonMobil (XOM), ConocoPhillips (COP), Royal Dutch Shell PLC (RDS.A) and Deckers Outdoor Corporation (DECK).
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Here are highlights from Friday's Analyst Blog:
Chevron Fails to Deliver
Chevron Corporation (CVX) – the second largest U.S. oil company – reported weaker-than-expected third-quarter 2010 profits. Earnings per share (excluding foreign-currency effects) came in at $2.06, below the Zacks Consensus Estimate of $2.15. This was mainly on account of costs related to the Gulf of Mexico (“GoM”) drilling moratorium and lower U.S. volumes.
As a result, Chevron could not match the soaring profit gains posted by other integrateds, such as ExxonMobil (XOM), ConocoPhillips (COP), Royal Dutch Shell PLC (RDS.A) though it was the latest to benefit from higher commodity prices and stronger refining margins.
On a brighter note, Chevron's adjusted earnings per share improved 14.4% – from $1.80 to $2.06. Quarterly revenue rose 6.6% (from $46.6 billion to $49.7 billion) and was 3.3% above our projection amid stronger oil and gas realizations.
Shares of Chevron have lost more than 1.9% as of this blog post in Friday trading on the New York Stock Exchange.
Upstream
Chevron's total production of crude oil and natural gas increased marginally (by 1.3%) from the year-earlier level to 2,738 thousand oil-equivalent barrels per day (MBOE/d), driven by volume gains in Thailand and Brazil, which were almost offset by normal field declines in the U.S. and downtime associated with maintenance and repairs.
U.S.output dipped 7.1% year-over-year though Chevron's international operations (accounting for 75% of the total) experienced a 4.6% rise in volumes. Gains on the overseas production front were supported by higher realized oil/gas prices. However, these factors were more than offset by higher expenses, resulting in a 4.6% year-over-year drop in upstream earnings to $3.6 billion.
Production Outlook
Despite lackluster volume growth during the quarter, Chevron's production outlook remains one of the most robust in its peer group, with a number of major deepwater projects scheduled to come online during the next few years. Major start-ups during the last few months include the Tahiti and Perdido in the Gulf of Mexico, Frade offshore Brazil and Tombua-Landana in Angola.
Recently, Chevron announced its plans to invest approximately $7.5 billion to develop two large fields – Jack and St. Malo – in deepwater GoM. The company has also acquired a 70% operated interest in three deepwater concessions in Liberia.
Downstream
Chevron's downstream segment's earnings jumped to $565 million during the quarter, as against a profit of $262 million in the previous-year period. The positive comparison can be attributed to improved refined products margins and higher earnings from chemical operations (primarily from the 50%-owned Chevron Phillips Chemical Company LLC), partially negated by lower refined product sales.
Capital Expenditure & Balance Sheet
Chevron spent $6.1 billion in capital expenditures during the quarter, up 33.0% from the year-earlier level. Approximately 89% of the total outlays pertained to upstream projects. As of September 30, 2010, the company had $11.0 billion in cash and total debt of $10.6 billion, with a debt-to-total capitalization ratio of about 9.4%.
New Share Repurchase Program
Chevron further informed that it will restart quarterly buybacks of up to $1 billion of its common stock starting from the fourth quarter of 2010. The San Ramon, California-based oil behemoth is targeting a quarterly repurchase rate of $500 million to $1 billion as part of a program earlier approved by the Board of Directors.
Our Recommendation
Notwithstanding the earnings disappointment, we remain encouraged by Chevron's longer term operational outlook. We like Chevron's strong pipeline of development projects and impressive recent exploration successes that will drive its long-term success. The company's high oil price sensitivity and rebounding downstream operations add to the positive sentiment.
However, production shortfalls associated with PSC (Production Sharing Contract) interest reductions, exploration results and unpredictable refining performance continue to keep us on the sidelines. As such, we are currently Neutral on Chevron shares with a Zacks #3 Rank (Hold).
Deckers Beats, Lifts Outlook
Deckers Outdoor Corporation DECK, the maker of a variety of footwear, recently delivered better-than-expected third-quarter 2010 results on the heels of strong demand for the product lines under the UGG and Teva brands, prompting management to lift its fiscal 2010 outlook.
The quarterly earnings of $1.07 per share outdid the Zacks Consensus Estimate of 93 cents, and rose 24.4% from 86 cents earned in the prior-year quarter.
Behind the Headline
Deckers said that total net sales jumped to $277.9 million, up 21.7% from the prior-year quarter, comfortably surpassing the Zacks Consensus Revenue Estimate of $266 million. The company's sustained focus on new product introductions and geographic expansion have helped achieved robust growth.
Domestic sales for the quarter rose 14.3% to $204.7 million, whereas international sales soared 48.2% to $73.2 million. International sales now represent 26.3% of total sales up from 21.6% in the year-ago quarter.
The international markets provide a significant growth opportunity, and we remain optimistic about the company's incremental sales and earnings potential. Internationally, the company distributes its products throughout Europe, Asia Pacific, Canada and Latin America.
UGG brand net sales grew 20.2% to $255.8 million and Teva brand net sales surged 51.7% to $13.7 million. Combined net sales of Deckers' other brands for the quarter soared 26.5% to $8.4 million.
Sales for the retail store business surged 63.3% to $20.2 million, propelled by the rise in same-store sales by 17.9%, and the opening of 8 new stores since the prior-year quarter. The company increased its domestic in-store shops to about 100. In China, the company opened 3 new UGG retail stores. Sales for the company's eCommerce business climbed 3.8% to $8.7 million.
Despite a 12.6% increase in cost of goods sold, gross profit jumped 33.7% to $131 million during the quarter, whereas gross profit margin expanded 420 basis points to 47.1%, reflecting better sales mix, direct distribution for the Teva brand in the Benelux region, refunds of duty, and margin improvement across all brands.
Management now expects the rise in manufacturing and materials costs to touch the high-end of the previously provided guidance range of 5% to 10% in fiscal 2011 due to increase in commodity prices, which may dent gross margin.
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