With the results in hand from Exxon Mobil (NYSE:XOM) and refiners like Valero (NYSE:VLO) the big surprise for the second quarter would have been if Chevron (NYSE: CVX) had posted a good quarter in refining. Chevron didn't do so, and the company's performance in the upstream E&P business was also a little light. Coupled with a somewhat higher capex spend this quarter, it was a pretty “blah” report for this international energy major. By the same token, given that growth isn't going to really change much until Gorgon gets going (around 2015), it's not a story-changing quarter and Chevron continues to look like a decent pick in the major energy space.

Refining Hits Another Energy Company's Quarter
The U.S. refining business was a tough one in the second quarter, and it has hit the results of more than one company so far. With that (and some underperformance in the upstream business as well), Chevron missed the average analyst estimate for the quarter.

Revenue was down 8% for the quarter, with pre-tax income down 30%, but those are seldom the numbers that investors follow with companies like Chevron and Exxon.

SEE: Oil And Gas Industry Primer

Looking at the exploration and production (E&P) operations, production declined 2% both from last year and the prior quarter, which was more or less in line with expectation. It's also worth noting that liquids production was down more (down 4% and 3%, respectively). Upstream earnings declined about 13% for the quarter, with the U.S. business down 18% and the international business down 12% (leading to a miss relative to expectations). On a positive note, Chevron's per-barrel profitability (which declined about 10%) is still quite strong compared to ConocoPhillips (NYSE:COP), Exxon, BP (NYSE:BP) and most other major international oil and gas producers.

SEE: Oil And Gas Industry Primer

Downstream operations were a fair bit uglier. Profits dropped by more than half, leading to a double-digit miss relative to sell-expectations, as the U.S. business (down 76%) was much, much worse than expected and the international business actually wasn't bad (down 34%, but above many analysts' estimate).

Hurry Up And Wait
Chevron has a lot of work to do over the next few years, but the results won't show up for a while. This company could generate upwards of 5% annual production growth annualized out to 2017, one of the best prospective growth rates in the sector, but a lot of that is going to come post-2015 and the company has a lot of work to do in the meantime to make that happen.

Making matters worse, it seems like Wall Street is getting a little irrational with these companies – stocks are punished if the companies lower production growth guidance, but the stocks are likewise punished when managements announce the capex spending that it takes to produce that future growth. Barring the discovery of a fairy godmother of oil that can grant oil production growth without any capex, companies have to walk that fine line of building for future growth but still maintaining a capital structure and capital return program of which shareholders approve.

Fortunately, Chevron is pretty good at this. Only Exxon is consistently better at generating returns on capital than Chevron, and both are well ahead of companies like BP, Conoco, Royal Dutch (NYSE:RDS.A), Total (NYSE:TOT). So with above-average growth prospects, above-average per-barrel profits, and above-average returns on capital, I'm pretty comfortable with the notion that Chevron is an above-average company in the space.

The Bottom Line
Chevron isn't terribly cheap. A 4.5x multiple to the next twelve months' EBITDA (a discount to Exxon, but one that has been in place for a while) suggests a fair value of about $131. Couple that with a 3% dividend yield and some recent relative underperformance, and Chevron could work as a stock. That said, if the energy markets improve, I could see a performance laggard like ConocoPhillips seeing more benefit in terms of improved results and valuation.

Disclosure: At the time of writing, the author did not own shares of any company mentioned in this article.
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