If Exxon Mobil (NYSE:XOM) had the wrong kind of earnings beat, it would seem that Chevron (NYSE:CVX) had the right sort of miss. More to the point, Chevron continues to operate one of the most profitable upstream businesses among the oil majors, and the company has a rich pipeline of growth projects to maintain higher production levels across the next five years. Coupled with an undemanding valuation, Chevron looks like a solid name to consider for broad international energy exposure.

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Earning Where It Counts
Where Exxon Mobil posted better than expected earnings but missed estimates on upstream profits, Chevron's adjusted EPS were actually below the sell-side average on higher than expected upstream profits. Given that many analysts and investors seem to view downstream operations (refining and chemicals) as non-core distractions to these companies, I would expect a generally positive reaction to these results.

Total reported revenue declined 6% from the year-ago quarter, but metrics like company-wide revenue and operating income don't count for much in this space. More importantly, Chevron's production was solid this quarter, as production increased 1% from the year-ago level and fell just 1% sequentially. By comparison, Exxon reported a nearly 4% decline, while ConocoPhillips (NYSE:COP) was down almost 2%.

Chevron remains an oil-heavy (about two-thirds of production) story, and that is certainly helping profits. Chevron's upstream profits fell 4% from last year, but rose 8% sequentially and unit profitability came in at just under $25 per barrel of oil equivalent. That's meaningfully more profitable than Exxon and Conoco, more profitable than Hess (NYSE:HES) as well, and likely second only to very oil-heavy Petrobras (NYSE:PBR).

Relative to Exxon, Chevron certainly didn't do quite as well on the downstream side. Downstream earnings were up 15% from last year, but down about one-quarter sequentially, and lower than analysts expected.

SEE: Oil And Gas Industry Primer

Oil Today, Oil Tomorrow … And Oil Forever?
While Exxon gets a lot of positive press for it's long-term management philosophy and strong long-term returns, Chevron has actually been the more profitable company recently, and the one with better cash returns.

You don't have to go very far to see why – where Exxon (and many other majors) have established a nearly 50/50 mix of oil and gas, Chevron has been much more heavily weighted towards oil. As has been well and thoroughly discussed, U.S. natural gas prices have been pretty poor for a while now, all while production costs have been increasing.

The big question in my mind, though, is whether this will continue to be true in the future. Companies like Cummins (NYSE:CMI) and Caterpillar (NYSE:CAT) have been doing more and more to support an eventual transition towards away from reliance on crude oil-based diesel and towards alternative natural gas fuels. Likewise, many other industries have been looking to switch towards natural gas as a cleaner, cheaper energy source. So that leads to the long-term question of whether natural gas prices are destined to climb (and/or outperform relative to oil) and reward companies like Exxon and BP (NYSE:BP) that have more balanced portfolios.

To be sure, Chevron hasn't entirely neglected natural gas. The company has significant LNG projects like Kitimat, Gorgon, and Wheatstone under development, and Chevron has quietly assembled quality U.S. unconventional gas assets. Still, I suppose you could argue that Chevron may need to do a deal at some point in the future to shift its oil/gas balance more towards gas (especially in the U.S.), but once it becomes clear that's necessary, the prices for good assets will have already gone up significantly.

SEE: What Determines Oil Prices?

The Bottom Line
The theoretical discussion of Chevron's future position in natural gas notwithstanding, I do like Chevron quite a lot among the oil and gas majors. The company's reserves have good geographical balance and management has shown that it can deliver the profits. While the company is going to have to commit considerable capital to develop projects, that's broadly true for everybody. I might argue as to whether Chevron deserves the 10% or so valuation discount it often gets to Exxon, but even if it does the shares look too cheap today, as fair value would seem to be around $130 per share.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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