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More Refining Blues: Chevron Expects 4Q Profit Fall

Chevron Corp. expects its fourth-quarter earnings to be lower than the previous quarter due to weak refining margins, the company warned in an interim update Monday afternoon. The company is expected to report its fourth-quarter earnings Jan. 29.

Chevron is certainly not the first -- nor will it be the last -- company to see its bottom line squeezed by weak refining margins. And the news was far from a surprise. Last October, former Chevron Chairman and CEO David O'Reilly said the outlook for the refining business is going to be downright "sloppy." The San Ramon, Calif.-based company reported Monday earnings from its exploration and production operations are projected to be in line with the third quarter thanks to higher crude prices. But its downstream segment -- the refining and marketing part of the business -- is expected to take a hit. Weak refining margins are expected to push Chevron's downstream earnings sharply lower than the previous quarter.

The super major has taken steps to protect itself from the weak demand and high inventories that have caused margins to shrink over the past year. Chevron has focused on what it considers to be two growth areas: the West Coast of the U.S. and the Pacific. Margins in the West coast helped Chevron's third-quarter earnings from falling even lower. Although refining margins in the fourth quarter improved from November to December, they appear on track to be lower than the third quarter, according to Chevron's report filed Monday.

The company has culled the parts of its downstream portfolio that do not match up with West coast and Pacific focus. Last month, Chevron announced it will withdraw its motor fuel operations in some areas of the Eastern United States as part of its strategy to leave markets where it is not competitive. The second-largest U.S. energy producer will debrand about 1,100 independently-owned and operated retail stations in Washington D.C. and a number of Eastern states.

With refining margins still so far off from where they need to be, other super majors including ExxonMobil and Royal Dutch Shell will likely continue to cut back on their downstream operations. Or at the very least take a page from Chevron's play book and shift to growth areas. Chevron has already announced it will scale back spending in its downstream segment by about $900 million in 2010.

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