Why We Maintain a Bullish Stance on Chevron

Chevron Corporation’s (NYSE: CVX) earnings are currently taking a hit from its downstream segment, following a prolonged weakness in the energy giant’s upstream division. The oil giant posted a net loss of $1.47 billion during the second quarter of fiscal year 2016, which is much lower in comparison to its net profit of $571 million during the year-ago quarter.

The earnings performance of Chevron stayed disappointing on a sequential basis amid a significant impairment on the company’s assets, regardless of better results from the upstream division. Although the energy giant is experiencing difficult times, we believe that market players should keep their hopes up and anticipate a market rebound soon.

The downstream segment’s performance is still a huge concern for market players, as the refining margins declined by $620 million year-over-year. The oversupply in the gasoline markets was the major factor that caused the downturn in the prices of the commodity to a level that is much lower than before. In addition, the end of the summer season, which signals the plunge in the demand for gasoline, was yet another factor that resulted in the market decline.

During the month of June in 2016, gasoline inventories rallied by up to 9 percent higher than the industry’s 5-year average. Aside from the reasons mentioned earlier, the downturn can also be attributed to the milder than expected winter, which lowered the demand for heating oils in the region. As heating oils trade at a discount to gasoline, it has been a preferred alternative. Thus, the demand for gasoline was adversely affected even further.

Yet, recent data suggest that refining margins seem to have bottomed out in the month of July and are currently on the rise. As the demand for gasoline is gradually increasing, this would definitely help the deteriorated margins. Apart from that, the lower level of refinery usage would lead to downbeat production, thereby, a modest plunge in inventories could be anticipated, as well.

The Energy Information Administration also appears to maintain a bullish stance on the demand for gasoline, and believes that a boost of approximately 150,000 barrels per day is possible to happen in the current year. Having said that, the plunge in output and improved margins should bode well for the downstream segment of Chevron Corporation.

Aside from that, the downstream products’ demand can also be anticipated to edge higher in the future. For instance, higher Chinese auto sales could become a catalyst for an increased demand for gasoline. Additionally, recent data suggest that a potential boost in the energy giant’s downstream products worldwide could occur.

With this, the oil company is also increasing its investment to cater to the increasing demand and could contribute to the earnings of the firm soon. Considering all the factors mentioned earlier, we strongly believe that the performance of the downstream segment can be anticipated to get better soon.

As of 10:26 AM GMT -4 on September 6, the CVX stock is trading at $101.17, up by 0.23 percent or 0.23 points.

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