Will Angola Create Rough Patch For Chevron Investors?

| About: Chevron Corporation (CVX)

The Angolan success story is not something that one can easily brush off. The West African nation is currently the second largest oil producer in Africa and is an OPEC member as well. The country exports 1.8 billion barrels of crude oil per day and that is more than many countries in the Middle East as well. With that in mind, it might be interesting to note that Chevron (NYSE:CVX) is one of the top producers of oil in Angola. The company loads two 920,000 barrel tankers each month and the number is only increasing.

The 920,000 barrels are drilled at the Kuito offshore oil terminal, where the company discovered a fault with a mooring line. Chevron's Cabinda Gulf Oil Company declared a force majeure in order to conduct maintenance work. Many people have cited concerns about the suspension of work, as Angolan authorities are known to take things very seriously when obligations are not met. This will not have long-term effects on Chevron's fundamentals. However, it may cause short-term fluctuations until the production is back to normalcy.

Angola is one of the most volatile African nations and has just emerged from a civil war. The country has seen a sudden influx of wealth generated from its oil and gas resources and has often been criticized for its violence, corruption and bureaucracy. Nevertheless, companies like Chevron have helped the nation to achieve the status of a major oil producing nation.

If Chevron is unable to meet its obligations temporarily, the country's authorities will not be able to do much. By declaring force majeure at the Kuito offshore oil terminal, Chevron has ensured that it will not have to face any legal complications. This may sound like a no-brainer to most people, but when it comes to Angola, things can go really wrong. Much of the power is vested in few individuals who have ties with former rebel groups. These groups are known to be violent and have often stolen crude oil from pipelines and tankers, often with the knowledge of authorities.

The situation is not as bad as it is in Nigeria at the moment, but it is still something that causes concern to most observers. Moreover, Angola's growing inequality has led many poor Angolans to hold a grudge against people they see as operatives of the ruling class. This includes Chevron and its executives, who are often at the mercy of both Angolan employees and the government. Of course, Chevron has often insisted that its business is secure in Angola and that the Angolan authorities are supportive to its interests.

It is quite true as well, but it is always useful to understand the risks associated with foreign governments and their local political atmosphere. At the moment, Angola is still a volatile country where failing to meet obligations can result in a situation where a company like Chevron will have to seek considerable legal assistance. The force majeure will likely help the company to insulate itself against any untoward accusations from the government authorities. The next step probably would be to ensure that the mooring line holds its ships together in place.

When Chevron manages to get its mooring line fixed, the production levels will hit previous levels of 920,000 barrels a month again. This number is very crucial for Chevron to assure its investors that things are going smoothly in Angola. I do not expect this force majeure to have a significant effect on the way Chevron's fundamentals appear. In fact, the Angolan development will have no effect whatsoever on Chevron's numbers but it only makes investors step back and think how careful the company really is, when it comes to ensuring that foreign governments do not take the company hostage, when unscheduled hurdles occur in production.

Fundo Soberano de Angola, or FSDEA overlooks foreign investments in Angola and is managed by a 3-member board. The new agency will oversee foreign oil companies like Exxon Mobil (NYSE:XOM), BP (NYSE:BP), Total (NYSE:TOT), Petrobras (NYSE:PBR) and Chevron. Exxon Mobil's presence in Angola is overseen by its affiliate, Esso Exploration Angola (Block 15) Limited (Esso Angola). Through that agency, Exxon has explored and drilled for almost 15 years and it recently celebrated its 15th anniversary in Luanda. The company was awarded Block 15 in 1994, and it has been going strong ever since.

BP on the other hand is taking education of Angolans very seriously. In 2007, it launched the first ever Master's of Law Degree (LLM) in Oil & Gas, affiliated to the Faculty of Law of Agostinho Neto University. The graduates have found work at oil rigs. Total recently sold 9.99% of its indirect interest in Angola Block 14 to Inpex Corporation. The move was widely seen as an unwise decision, especially when Angola started a sovereign wealth fund with $5 billion. Meanwhile, Petrobras has reached an accord to sell its African assets. The company has been on a selling spree in order to divest its smaller fields. Petrobras' restructuring strategy is seen as a move towards concentrating on its larger oil fields.

Chevron's fundamentals are directly influenced by its portfolios abroad. Considering the impasse in Angola, we may expect short-term fluctuations in the way its shares are traded. At the moment, Chevron trades at $106 and has a price to book ratio of 1.56. The company's price to sales ratio is 0.92, which indicates that it can do better than it is at the moment, and there is scope for growth. Chevron will also have to catch up with its rivals by exploring in newer fields and producing more. With a profit margin of 10.70% and an operating margin of 15.72%, the company is still a good bet for investors. Chevron's total cash is $22 billion and its operating cash flow is $35 billion. Its total debt is $12.34 billion, which is not a huge liability. In the end, Chevron's numbers are still impressive enough and a great investment option.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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