The slump in crude oil prices may spell trouble for Chevron’s earnings, especially when combined with the company’s high capital spending.

Oil prices have plunged during the second quarter, with both West Texas Intermediate and Europe’s benchmark Brent crude losing more than 25% from their highs early in the year. That may be good for consumers, who will have to fork over less of their cash at the gasoline pump, it’s grim news for integrated oil companies like Chevron, which have invested significant sums in finding new sources of oil, only to discover that the price per barrel begins to plunge. With crude prices now approaching two-year lows (as seen in the chart below), and given that its capital spending is at record high levels, it is little wonder that Chevron Corp. (CHV.N) appears likely to report earnings that fall below analysts’ estimates. With a large negative Predicted Surprise of -5.2%, the prospects are that when it comes time for the large integrated energy company to report its second-quarter results in late July, it will fail to deliver on analyst expectations, as measured by the I/B/E/S consensus estimate of $3.30 per share.

In the last year, Chevron has invested in several projects aimed at boosting the company’s future production, as seen in the higher rates of  capital expenditure (represented by the blue bars in the chart below) in the last four quarters. Indeed, the $28 billion that Chevron has invested in developing new projects during the last four quarters is the largest investment Chevron has ever made in any four-quarter period. Currently, the company’s cash flow from operations (CFFO) exceeds its capital spending. But that may change in the coming months if  the lower oil prices take a toll on CFFO; there is a risk that CFFO may fall to a point where it will no longer be adequate to support those capital expenditures.

That outsize spending has already put a dent in Chevron’s free cash flow (FCF), which is lower than its net income. (In the chart below, on the right, the red portions of the bar represent the amount by which the company’s net income exceeds its FCF.) To be sustainable, a company’s earnings typically are backed by FCF that is substantial enough to exceed its net income; that clearly isn’t the case at Chevron. Finally, Chevron set aside $1.6 billion to meet quarterly dividend payments in the first quarter. The company’s FCF of $2.5 billion barely covers that dividend payment; that makes us wonder about the future prospects for the dividend. It appears unlikely that Chevron will be in a financial position to increase that dividend – and dividend growth appears to be a prime reason for many investors to own the company’s stock – and that without a change to either its spending or revenues, it will continue to be a strain for the company to continue those payments in coming quarters.

Unsurprisingly, analysts have been cutting their earnings estimates for Chevron during the last 30 days. The I/B/E/S consensus estimate (represented by the gold line in the chart below) for the second quarter stood at $3.40 a share just 30 days ago but since then has fallen to $3.30. That is still 18 cents above the StarMine SmartEstimate, however, which is only  $3.12 a share. One highly-rated analyst has posted a significantly lower forecast, predicting that Chevron will report earnings of only $2.94 for the second quarter. StarMine refers to forecasts from top-ranked analysts that vary greatly from the consensus as Bold Estimates; given their track records, odds are that the analyst’s predictions will be on target once more. In the case of Chevron, that Bold Estimate, combined with the large negative Predicted Surprise, signals that the consensus forecast is likely to continue to fall in the coming weeks, or that the company will miss estimates when it reports earnings next month.

The problem is a complex one. At the new, lower, oil prices, Chevron’s costly new projects may not be as lucrative as the company’s executives had originally anticipated. And crude oil prices may not rebound any time soon: concerns about global growth a fall in demand from emerging economies like India and China, and the prospect of robust supplies will help limit future price gains. Chevron faces a tough dilemma: forging ahead with its projects means bringing yet more crude oil onstream, which is likely to further weigh on prices. On the other hand, failing to invest in these projects will give Chevron’s competitors the upper hand. As it faces that quandary, Chevron also is likely to disappoint its investors by delivering weaker-than-expected earnings when it announces its second-quarter results on July 26.