Tuesday, April 8, 2014

Chevron Tries to Build Value as It Cuts Costs

This article was originally published by TheStreet on April 1, 2014
By Sarfaraz A. Khan. Research assistant: Gohar Yousuf
NEW YORK (TheStreet) -- Chevron (CVX_) has cut its 2017 production forecast by 6% to 3.1 million barrels per day. You'd think that means bad things ahead for the second-largest U.S. oil company.

However, the company thinks it can boost its value to shareholders through a combination of lowering  capital expenditures by 5% and higher production through five major projects that could come online within the next two years.

Chevron's cut in its forecast followed assets sale, rising costs, falling natural gas prices and project delays. Still, the projected production would be a significant improvement from last year when the company reported net oil equivalent production of 2.6 million barrels per day.
Chevron's shares, at around $119, have fallen by 4.5% for the year to date and by 0.2% for the last 12 months. Its biggest rival, Exxon Mobil (XOM_), trades at $97.50, is down 3.7% for the year to date but up 7.4% for the last 12 months. By comparison the S&P 500 is up1.7% for the year to date at 20.3% for the past 12 months.

Chevron is trying to rein in capital expenditures at $40 billion per year through 2016, a 4.8% drop from $42 billion in 2013.
Interestingly, despite the cut in capital expenditure, Chevron could still outspend its bigger rival Exxon Mobil in the coming years. Exxon Mobil has planned to spend an average of $37 billion on capital expenditures between 2015 and 2017, which is considerably lower than Chevron's budget for 2016.
Meanwhile, Chevron is eying growth on the back of rising demand coming from the energy hungry Asian economies that meet 40% of their natural gas demands through imports.
As a result, Chevron has forecast a 45% increase in its production from Asia Pacific by 2017 to 1 million barrels of oil equivalents per day. The demand for natural gas from Asia could continue to grow by 75% by 2025. Chevron could, therefore, continue to enjoy high levels of demand in this region.
Almost 90%, or $35.8 billion, of Chevron's 2014 capital expenditure would go towards its exploration and production business. Of this, $27.9 billion would be spent on international operations and $7.9 billion on its domestic business. A part of this will flow towards the four major upstream projects under development that could give a boost to the company's output in the near future.

The two massive projects in Australia, the $50 billion Gorgon project and the $29 billion Wheatstone Project in Australia, could position Chevron as the biggest natural gas supplier and LNG operator in Asia-Pacific. Chevron owns a 47.3% stake in Gorgon and a 64% stake in Wheatstone. The LNG plants at Gorgon and Wheatstone represent a combined capacity of 24.5 million tonnes per annum as well as domestic gas plants. The two projects could come online within the next two years.
The other two projects are located at the Gulf of Mexico: the $7.5 billion Jack/St. Malo and the $4 billion Big Foot deepwater project.
The former represents two fields that are located within 25 miles of each other and are being jointly developed through a single floating production facility. Chevron is the operator in these fields with a 50% interest in the Jack field and a 51% interest in the St. Malo field. The Jack/St. Malo could result in production of up to 94,000 barrels of oil equivalents per day.
Similarly, Big Foot field, where Chevron holds a 60% interest, also looks promising as it holds reserves of more than 100 million barrels of oil equivalents. The facility at Big Foot will have a production capacity of 79,000 barrels of oil per day.
Jack/St. Malo could begin operations in the current year while Big Foot could start in 2015. Besides these major projects, Chevron has a 42.9% non-operating working interest in the Tubular Bells project, which is another deepwater prospect at the Gulf of Mexico. This project, which is operated by Hess Corp  (HES_), comes with a price tag of $2.3 billion and production capacity of more than 40,000 barrels per day, could come online in the current year.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.