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Chevron Adjusting to Unocal, Price Issues

Declining oil prices will offset production increases as the company digests its acquisition.

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has been one of the laggards among the major integrated oils as the company has been digesting its latest acquisition of Unocal and missing ongoing production targets. CVX has not raised output in six years. Excluding the UCL acquisitions, production output is expected to decline again for 2005. Since 1998, production has declined about 3% per year. CVX has made inroads to increase production through some international projects, but there will be no impact in the fourth quarter of 2005.

Street estimates for the quarter are for $1.89/share and $6.61 for the full year. CVX has been aggressively returning money to its shareholders through its share buyback program and 12.5% dividend increase. The company has also been reducing debt. CVX has estimated previously that the hurricanes cost the company about $600 million in lost profits and repairs. CVX should update these figures for the fourth quarter. Street estimates for revenues are at $51 billion. Revenues may be light, as oil prices declined in the quarter. It seems unlikely that the shortfall was made up by natural gas revenue, since they only constitute about one-fifth of total revenue.

I do expect CVX to announce an increase in production for 2006 on the order of 5%-6% as projects in the Gulf of Mexico come on line. However, that news may be dampened by the unrest in Nigeria and the impact on two projects there (gas pipeline and gas-to-liquids). Also, additional focus should be given to CVX's Asian upstream exposure, which now constitutes 29% of CVX's total output.

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Edward J. Stavetski founded Pembroke Capital Management in 2002. He is the chief investment officer and manages money for individuals, small business pensions and small foundations. PCM's investment style is large-cap and small-cap value. Before founding PCM, Stavetski was director of research for Pitcairn Trust Company, a family office and mutual fund company; chief investment officer and managing director of PNC Advisers, the investment management and trust division of PNC Bank and senior portfolio manager for Rorer Asset Management, an investment advisory firm managing individual and institutional portfolios. He graduated with a bachelor's degree from West Virginia University. He is a member of the Association for Investment Management & Research (AIMR) and the Financial Analysts of Philadelphia. He is also a board member of Financial Analysts of Philadelphia and serves as vice-chairman of AIMR's professional development committee.