Chevron (CVX) CEO John Watson recently spoke to The Associated Press regarding affordable energy, natural gas and fracking. These are the key issues that concern energy investors today. Based on the excerpts of the interview published on Tulsa World, Chevron will continue to increase its margins in 2013. To do so, it will tackle three issues that are crucial to the future success of energy companies - affordable energy, natural gas and fracking.
Affordable Energy in an Increasingly Demanding World
Higher gas prices are associated with unrest, social discontent and possible re-elections. Thus, governments are always keen to keep energy prices low and affordable, though it is usually difficult to do so. Mr. Watson revealed that Chevron will invest $33 billion to drill wells, build new refineries, and look for undiscovered oil and natural gas in a quest to meet the growing demand for fuel.
Mr. Watson rightly pointed out that energy demand is so high that it is becoming increasingly difficult for even big companies like Chevron, Exxon Mobil (XOM) and Anadarko Petroleum (APC) to keep up with the production that is actually required. By ensuring that there are enough known oil and gas reserves, Chevron is working towards keeping energy prices affordable across the world. In the long term, this will help Chevron to increase its management effectiveness and return on assets, which currently stands at 10.25%.
Natural Gas Prices
Natural gas prices are at its lowest levels in the U.S. Mr. Watson predicted that natural gas will displace coal in power generation. He admitted that transporting is difficult and that Chevron is working on developing special vehicles to transport and ship natural gas. He also admitted that it will take time, but it is happening. Chevron has already purchased a 50% stake at the Kitimat LNG project in British Columbia. Chevron is also working towards developing its natural gas production so that it can supply to energy-deprived countries like China, India, Brazil, Russia, Japan and Korea. In the long term, a focus on natural gas will increase Chevron's profit margin as its natural gas projects in Australia and Canada are free from security and political risks. At the moment, Chevron's profit margin is 10.70% and its operating margin is 15.72%.
Fracking and Its Future
There has been a lot of resistance and anger directed towards fracking. In the interview, Mr. Watson said that fracking will not be curtailed in the U.S. Despite all the rhetoric against fracking, he believes once legitimate concerns are resolved, there will not be any more problems. Mr. Watson also said that Chevron will continue to speak to governments in order to make it easier for the company to engage in fracking, as opposed to traditional methods of drilling. This is failproof, as fracking as a method will need to be used more often when natural gas is discovered under a rockbed.
One of the low points of such disagreements between governmental agencies and oil companies regarding fracking is Royal Dutch Shell (RDS.A). Shell announced in December 2012 that it will abandon plans to frack for natural gas in British Columbia. However, British Columbia will compensate Shell $20 million for the failed project, which was due to an indefinite moratorium on fracking.
Exxon Mobil, the largest U.S. energy company, is working swiftly toward consolidating its assets in North America and purchasing new assets. It has often been said that Exxon has been stagnant in making new investments. However, Exxon will now operate the Hebron oilfield in Newfoundland and Labrador in Canada, and will invest $14 billion to develop it.
Anadarko has agreed to work with Italian oil giant Enersis (ENI) in Mozambique. Both Anadarko and Eni will cooperate in Mozambique in order to increase LNG production and help Mozambique become the first East African country to export LNG.
With these investments, Chevron is ensuring that there are enough wells, shales and fields to explore and drill and meet the demands of an increasingly overpopulated world with the right technology. Mr. Watson reiterated that Chevron is one of the most 'future-proof' energy companies in the world, thanks to its investments. Its largest 'future-proof' projects are: a natural gas project in Australia which will cost Chevron and its partners $65 billion, three deep water drilling projects in the Gulf of Mexico, and natural gas projects in British Columbia. All the three projects are located in countries which are business friendly without any security risks. The interview will increase investor confidence. Chevron is doing everything right to ensure long-term profitability.
Chevron currently trades around $110 and has a market cap of $216 billion. With a price to sales ratio of 0.96, it is a tempting stock to purchase. Moreover, it has a profit margin of 10.70% and an operating margin of 15.72%. It has a return on assets of 10.25%, which suggests it is managed effectively. Certainly, Mr. Watson's interview shows that the company will concentrate on exporting natural gas, making fracking widely available as a technology and keeping energy prices low throughout 2013. This means, the company's profitability and gross margin will continue to increase and will remain a stable investment option.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.