In Chevron's Big Miss, Big Oil Looks Like Wildcat Explorer

NEW YORK (TheStreet) -- Chevron(CVX) typically beats, but it's getting beaten up by investors for a change on earnings day.

Higher expenses on lower production always gets the independent exploration and production companies in trouble with investors, as do the surprise reasons for the discrepancy. Chevron seems to be getting a taste of that kind of market slap on the oil explorer wrist on Friday, with its production numbers down across the board in the fourth quarter as its expenses went higher.

Big Oil stocks don't tend to move much on earnings, but Chevron shares were down close to 3% on Friday, significant for a morning on which the energy sector was close to flat and crude oil higher. It's significant also that Chevron is the only major oil company to release an interim earnings report ahead of earnings day, which should limit the impact of the actual announcement on shares.

Higher expenses on lower earnings and production means a big earnings disaapointment for Chevron.

In that Chevron interim report released earlier this month, Chevron said refining would be weak and upstream -- exploration and production -- would be similar to the third quarter.

The refining weakness was obvious -- the business was at a loss in the fourth quarter. But that wouldn't have surprised anyone, and refining business isn't a big driver of earnings, though in recent quarters it has been an outperformer. Even moving to a loss, it wouldn't explain the size of Chevron's miss, and it was a big one: $2.58 in earnings from Chevron versus a consensus estimate of $2.85 from Wall Street analysts.

The E&P results were worse than expected. Chevron had said in the interim report that results would be similar to the third quarter, but the results were probably not what an investor would describe as similar.

Upstream earnings came in at $5.7 billion, versus $6.2 billion in the third quarter 2011. The sequential decline in E&P income was 10%. "More than I expected," said Argus Research analyst Phil Weiss.

"The fact that upstream earnings were as far off as they were could be behind the decline [in shares]," said Raymond James analyst Stacy Hudson. Hudson noted that expenses for E&P went up, too, even as production declined. This could suggest that Chevron had some "dry holes" in the quarter that needed to be written off.