Can Chevron Investors Look Past $200M-$400M Hess Q3 Drag?

Chevron Corporation (CVX) recently finished its major acquisition of Hess, but the financial costs of merging the two massive companies will temporarily hit its short-term results. The U.S. oil giant disclosed that it expects the merger to reduce its third-quarter earnings by anywhere from $200 million to $400 million after taxes. This immediate impact shows that while the long-term benefit of the deal is huge, the upfront expense of integrating operations is significant.

This temporary financial setback comes directly from the complex process of absorbing Hess' business. Roughly half of the cash outflows for immediate costs, such as severance payments related to integrating the workforce, are expected to occur during the third quarter. Even when those one-time charges are excluded, Chevron still anticipates a $50 million to $150 million negative impact on its adjusted earnings.

The company has assured investors that the big financial benefits and operational efficiencies of the Hess deal will start showing up in future quarterly earnings once the complex integration is successfully completed.

Looking specifically at production, Chevron forecasts that the newly acquired Hess assets will contribute a substantial amount: between 450,000 and 500,000 barrels of oil equivalent per day for the quarter, despite some expected operational downtime. Meanwhile, capital spending for the quarter is projected to be between $1 billion and $1.25 billion. Investors will get the full picture when Chevron reports its third-quarter results in early November. The Zacks Consensus Estimate for CVX is $2.13 per share on revenues of $52.1 billion.

Q3 Outlook for ExxonMobil, Shell

ExxonMobil (XOM), Chevron’s larger rival, is expected to announce its third-quarter results in the first week of November. The Zacks Consensus Estimate pegs ExxonMobil’s earnings at $1.73 per share on revenues of $88.6 billion. Notably, earnings estimates for ExxonMobil have been revised upward by two cents over the past month. Still, projections point to a nearly 10% year-over-year drop in earnings and a 1.6% decline in revenues.

Shell (SHEL), the European energy supermajor, is expected to release its third-quarter earnings toward the end of October. The Zacks Consensus Estimate calls for Shell to post earnings of $1.46 per share on revenues of $73.7 billion. Over the past month, Shell’s earnings forecast has been raised by two cents. Still, projections point to a 24% decline in profit from last year, even as revenues are expected to grow 1.7% year over year.

The Zacks Rundown on Chevron

Shares of Chevron have gained nearly 11% so far this year compared with the Oil/Energy sector’s increase of 7.3%.

From a valuation perspective — in terms of forward price-to-earnings ratio — Chevron is trading at a premium compared with the industry average. The stock is also trading above its five-year mean of 11.87.

See how the Zacks Consensus Estimate for Chevron’s earnings has been revised over the past 60 days.

The stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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