John Watson, the chief executive of one of the world's leading energy firms Chevron (NYSE:CVX) has recently said, while speaking at the Center for Strategic and International Studies in Washington, that while there are enormous resources of shale oil and gas available throughout the world, it will take considerable time, even decades, before they are developed.
The US Energy Information Administration's (EIA) recent estimates have shown that globally there are 345 billion barrels of oil and 7,299 trillion cubic feet of gas, technically recoverable unproven shale resources. While we have abundant information about the total reserves in the U.S and Western Canada that can be exploited using existing technology, very little is known about South America or Eastern Europe.
In Eastern Europe, Chevron has been looking towards Poland as one of its primary shale exploration play in the coming decade. In South America, it has been eyeing Argentina. The company believes that Argentina has the world's second largest shale reserves, as opposed to the EIA which thinks that China has more shale oil and gas than Argentina. Nonetheless, the country does have one of the largest shale oil and gas resources in the world and despite all the political hurdles, it makes sense for the oil major to maintain its strong presence in the country.
In Argentina, Chevron is partnering with the country's leading oil firm YPF (NYSE:YPF) to invest around $1.5 billion in the 7.4 million acre gigantic shale oil and gas field Vaca Muerta which was discovered more than two years ago by the Spanish oil major Repsol SA (OTCQX:REPYY) and YPF. The current deal has provisions to increase the value of investment to $15 billion. Unlike North America, where most of the shale gas developments are about natural gas, Argentina is focused on oil. This is mainly because Vaca Muerta has about 23 billion barrels of oil equivalents in reserves; roughly 70% of this is oil. In fact, Vaca Muerta is the second biggest shale-oil basin in the world.
However, Chevron had problems in Argentina due to its decades old dispute with Ecuador's indigenous population who allege that a Chevron subsidiary polluted Ecuador's Lago Agrio region. But the oil giant thinks that it itself was a victim of a fraud. The company was convicted by an Ecuadorean court and later in November 2012, under a treaty between Argentina and Ecuador, an Argentine court ordered an embargo on assets and future income on Chevron's subsidiary in Argentina.
The court's decision came at a bad time for the Argentine government which was encouraging Chevron to explore the country's vast unconventional oil and gas reserves. Chevron is the fourth biggest oil producer in Argentina. Earlier in March, Watson clearly stated that the company would not be able to develop the country's shale reserves with the embargo in place. But then earlier this month -- in an apparent victory for Argentina, YPF and Chevron -- Argentina's Supreme Court overturned the previous ruling thus paving way for further shale developments in the country.
I believe that the ruling works particularly well for YPF, whose shareholders welcomed the news and the company's ADR rose by 2% on 5th June. YPF's fallout with Repsol, when the Argentine government nationalized its 51% stake in YPF, made it a "pariah" in the international markets with few foreign firms willing to work with it. Moreover, the country's price controls and dividends policy have made it unattractive to foreign energy majors, despite the enormous size of its oil reserves. But with Chevron's partnership, perhaps YPF will be able to change its image.
So far, YPF's performance has been far from satisfactory. The company reported a drop in output in the previous quarter but it has reiterated its full year targets. In order to significantly increase its production, YPF has to tap into its unconventional resources and for this, it needs assistance from Chevron as the company doesn't have the necessary skills and resources required for shale development. In short, the Supreme Court's verdict is a win-win for both Chevron and YPF.
Chevron: Production Target & Stock Update
Chevron has been increasing its focus on natural gas, which is evident in its massive planned LNG investments, as by 2025, 40% of Chevron's output will be gas, as opposed to the current 30%. It has a medium term target to produce 3.3 million barrels of oil equivalent per day by 2017.
Chevron's shares are currently trading at $119.97. In April, Chevron increased its quarterly dividend by 11.1% to $1 per share and now has an attractive annualized yield of 3.33%. Barclays recently downgraded Chevron to 'equal weight' and raised their price target to $145 which indicates a potential upside of 21%. The company's stock has fallen by 3.8% in the last four weeks and at the current price levels, Chevron is a 'buy'.