In the first week of December, Chevron (CVX) announced that it will spend almost $37 billion in 2013 across the world. The increased capital budget spending will be used for oil exploration and building huge capital projects. The figure is a 12% increase from 2012 spending budget and an astonishing 70% increase since 2010. Based on my research, Chevron is taking the right steps to increase its profitability in the coming years. The increased capital spending will help Chevron to consolidate its existing assets and to discover profitable avenues which will increase the company's revenue in the long run.
Of the $36.7 billion that is slated to be spent in 2013, $33 billion will be spent in exploration and production of oil and gas. Of the $33 billion, $7.5 billion will be spent in the U.S., $3.4 billion in West Africa and shale regions across the world, $2.7 billion for refining and other downstream operations and another $3.3 billion for expenditures of Chevron's affiliates. Chevron will concentrate on Gulf of Mexico projects, operations in West Africa and the Gorgon LNG project in Australia, all of which are located in stable countries that do not have major risks.
The money that Chevron has decided to spend in 2013 will likely be used to build infrastructure and facilities that will help the company to transport what it drills. It is also important to note that Chevron wants to increase its worldwide oil and gas production to 3.3 million barrels per day by 2017. If Chevron wants to grow further, it will have to discover newer oil fields and consolidate existing oil fields, infrastructure and drilling facilities. With that in mind, the $37 billion capital budget is a very wise tactic to play catch-up with its competitors.
On the other hand, Chevron recently paid $155 million for the Brazilian oil spill and is still fighting a long standing environmental case in Ecuador, where authorities have demanded an exorbitant $19 billion in damages. Chevron's assets in Argentina have been frozen on this account, and the company has carefully sought to avoid spending in countries that are less friendly towards American oil companies.
Thus, Chevron's decision to invest more in the U.S. is likely to increase confidence among investors, and increased production at its Gulf of Mexico fields will augment the company's profitability. Moreover, West African nations like Angola, Liberia and Nigeria have consistently helped foreign oil companies to drill and operate without significant legal issues. Angola and Liberia also have stable governments that are oil-company friendly. Not much needs to be said about stability and growth opportunities in Australia, where the business environment is similar to the U.S. and is one of the most stable countries in the world for oil and gas corporations.
Chevron's competitors like Anadarko Petroleum (APC), Exxon Mobil (XOM), Royal Dutch Shell (RDS.A) and Marathon Oil (MRO) have all increased their capital budgets in order to meet spending demands. Exxon Mobil announced its plans to spend almost $185 billion in capital over the next five years. On average, Exxon might be spending $37 billion a year, which compares positively with Chevron's projected spending for 2013. Exxon has taken a positive macro view for the coming years, which is why it has decided to spend more than previous years as well.
Anadarko, whose successful business in Mozambique has now shifted focus to Kenya, is doing extremely well in Eastern Africa. The American oil and gas company has taken a proactive step towards building infrastructure in those countries, often spending from its own pockets. Anadarko's capital budget for 2012 was estimated to be under $7 billion. This figure is dwarfed by the spending of both Exxon and Chevron.
Marathon has been very active in Angola, Canadian oil sands and Kurdistan. The company announced a capital budget of $5.2 billion in 2013. Marathon intends to spend all that money in oil-rich unconventional fields in the U.S. Fox Business reported that almost $3 billion of its capital budget will be spent in oil-bearing shale formations in Bakken, North Dakota, Anadarko Woodford, Oklahoma and Eagle Ford, South Texas. The renewed American spending is expected to help Marathon witness an 8% boost in its production.
Shell has a capital budget of $30 billion in 2012. It had announced that 80% of its budget will be used in upstream activities. 60% of this was to be spent in North America and Australia. The company has faced difficulties in the market due to armed militancy in Nigeria. Shell has also faced flak in Sakhalin, where controversies related to environmental issues surfaced.
Chevron currently trades at $107 and has a market cap of $209 billion. With an enterprise value of $200 and a price to sales ratio of 0.93, we can say that Chevron's sales can see an improvement in the future, compared to its current numbers. Thanks to its increase in capital budget, facilities, infrastructure and investments abroad are going to get better, assuring investors of better returns. Chevron's price to book ratio is 1.57, which again tells us that Chevron can do better than what it is doing now.
With a profit margin of 10.7% and an operating margin of 15.72%, investors can expect stable returns in the long-term. Additionally, Chevron's latest moves will boost their confidence. Chevron has revenue of $225 billion and a total cash of $21 billion. Its debt is only $12 billion, which is comparatively small. With an operating cash flow of $35 billion, almost all of its capital budget can be met through this amount alone and the company has lots of money. Chevron's decision to increase its capital budget is a wise one, especially when we are talking about its rivals Shell and Exxon Mobil spending above the $30 billion mark.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.