Investeringskommentar, Allen Good CFA, 06/11/2015
In recent years, Chevron's oil portfolio has led to peer-leading margins and returns on capital. New production from the Gulf of Mexico, West Africa, western Australia, and the Gulf of Thailand will preserve its liquids price exposure and serve as the growth engine for Chevron in years to come, setting it up for peer-leading growth for 2015-18. However, we expect elevated spending and lower oil prices to result in lower returns.
Two liquefied natural gas projects in Australia, Gorgon and Wheatstone, will be the primary drivers of growth in the next few years. Gorgon, slated to start in 2016, will add more than 200 thousand barrels of oil equivalent per day of production at peak levels. Wheatstone, scheduled for startup in late 2016, will add almost 200 mboed. The investment in LNG production, while primarily gas volumes, has prices indexed to oil, which should allow Chevron to preserve its peer-leading liquids exposure. Also, projects like LNG, with long-plateau production levels that require little additional capital expenditure, help reduce decline rates while generating significant free cash flow to support reinvestment elsewhere or shareholder returns.
However, to achieve its growth, Chevron has spent more on a per-barrel basis than peers, while at the same time experiencing budget overruns on the Gorgon project. As a result, we expect returns to fall in the coming years on a combination of lower earnings (lower oil prices, higher depreciation) and increased capital employed, which should offset the benefit of greater production and higher downstream earnings. That said, we expect free cash flow to rise during the next five years thanks to improving oil prices, growing production and falling capital spending, the combination of which should allow Chevron to be cash flow neutral after dividends in 2017.
Bulls Say
- Growth is expected to increase post-2015 thanks to the startup of several projects, including the Gorgon LNG project, which should lead all majors while maintaining peer-leading liquids exposure.
- Chevron has accumulated U.S. unconventional acreage through smaller deals in higher-quality plays like the Permian and Marcellus, thus avoiding overpaying and destroying value like many
peers.
- Chevron should realize improved downstream earnings and returns as conditions in its California refineries improve and new chemical production capacity is added via its CPChem joint venture.
Bears Say
- Chevron's higher growth is the result of higher spending, which will result in returns deterioration and lower free cash flow unless oil prices remain above $100/bbl.
- Cost inflation and currency appreciation plagued Chevron's Gorgon LNG development in Australia, damaging returns on a key project.
- The completion of Gorgon and Wheatstone will significantly increase Chevron's exposure to LNG at a time when oversupply in the market is likely to depress prices for several years.
