Chevron (CVX) is aggressively moving to enhance its production of Liquefied Natural Gas, or LNG. The Australian projects of Gorgon and Wheatstone are two of Chevron's major projects for the production and supply of LNG. With the demand for LNG increasing in growing Asian economies like Japan and China, these projects can provide future growth opportunities for the company. The LNG consumption of these countries is increasing, and domestic supply is unable to meet the demand. So, importing LNG is necessary, bringing Chevron's two projects into the limelight.
The Australian Ventures
Chevron is gearing up to be one of the major players to supply LNG in the Asia-Pacific region. It plans to supply LNG from two large projects located in Australia, the Wheatstone and Gorgon projects. In the second quarter ending in June this year, the company realized a sales price of $3.78 per thousand cubic feet of natural gas compared to $2.17 per thousand cubic feet in the second quarter last year. With the development on schedule, we believe the higher production volume will meet demand from the Asian countries and realize higher revenue for the company. Let's discuss these projects in detail and their importance to Asian countries.
- Gorgon project
Located in Western Australia, Gorgon is one of the world's largest natural gas projects. Chevron owns 47.3% of the production from the project. The current developmental plan includes three trains with a capacity of 15.6 million tons per annum, or MTPA, and is scheduled to begin delivery in 2015. A LNG train is used for liquefaction and purification of natural gas. Approximately 67% of the project is complete. Chevron signed a binding, long-term LNG Sales and Purchase Agreement, or SPA, for delivery of approximately 4.8 million metric tons of LNG per year, which brings delivery commitments to approximately 65% of Chevron's LNG share from this project. It will sell the natural gas from this project to Osaka Gas, Tokyo Gas, Chubu Electric Power, GS Caltex, Nippon Oil Corporation and Kyushu Electric.
- Wheatstone project
The Wheatstone project is also located in Western Australia. The project is a joint venture with multiple companies, and Chevron has a 64.14% share. The plant has an installed base of two LNG trains with a production capacity of 8.9 MTPA and an approval to increase its capacity to 25 MTPA. The company expects to start production by 2016 and already has around 80% of the output covered in long-term agreements, valued at around $19 billion.
With a combined capacity to produce around 24.5 MTPA LNG, these two projects will tremendously augment the company's LNG producing capacity. This capacity increase will also help meet the demand for LNG from two major economies in Asia.
Energized by LNG
The two projects are betting big on the demand for natural gas from these Asian countries, which is due to the need for cleaner sources of fuel. When cooled to negative 162°C, natural gas liquefies, becoming 1/600th the volume of natural gas, and is known as LNG. This facilitates the transportation of natural gas. We believe the demand from Japan and China will be robust for the following reasons.
Being the third largest economy in the world, Japan requires a huge amount of natural gas for energy production. It is estimated that Japan may require around 87 MPTA of natural gas. The major consumers of natural gas are electric utility companies. After the Fukushima disaster, there has been a major shift from nuclear powered plants to natural gas powered plants. Chevron entered a number of deals with Japanese electric producing companies to supply natural gas from its Wheatstone natural gas producing facility. These companies include Tokyo Electric Power Company, Kyushu Electric Power Company and Chubu Electric Power Company.
A part of the reason for promotion of natural gas is to reduce the country's cost of fuel imports. Last year China consumed around 147 billion cubic meter, or bcm, of natural gas, and the government plans to increase the amount of natural gas to 230 bcm by 2015. In order to increase natural gas consumption, the government is planning to enhance the infrastructure. Another reason is the Chinese government's push to use more environment friendly vehicles. This has led to the increased adoption of natural gas vehicles, or NGV, which pollute less than gasoline and diesel vehicles because they can reduce emissions by around 20%. In China, the number of NGV marketed this year is around 100,000 and is expected to rise to around 540,000 by 2015.
As we see it, Japan's increasing reliance on cleaner energy sources will drive the demand for natural gas. According to IEE, natural gas demand will rise by 1.5% starting this year through March of 2015. In China, the main driving factor continues to be government policies. In order to reduce pollution, the Chinese government plans to provide 8% of energy from natural gas by 2015 and 10% by 2020. This future demand for natural gas from these countries is expected to create an upside potential for Chevron's production of natural gas from its Australian fields.
Competitors to bring LNG to Asia also
A company with a formidable portfolio in LNG is Royal Dutch Shell (RDS.A) (RDS.B) with around 8% of the world LNG market. In February this year, the company received an approval from the National Energy Board to build a LNG export facility in Canada to export 24 million tons of LNG for 25 years. Royal Dutch Shell partnered with PetroChina, Korea Gas and Mitsubishi in the venture to export natural gas.
A major competitor of Chevron in the LNG market in Asia is Exxon Mobil (XOM), which is planning to export natural gas to these markets from Canada. Exxon Mobil and its affiliates sought approval from Canada's National Energy Board to build a 30 MTPA capacity plant to export natural gas in July this year. The company is planning to build six trains with capacity of 5 MTPA each and plans to start exporting gas by 2021.
The increasing shift of exporting natural gas to Asian markets is due to the higher price of the natural gas available in Asia compared to that available in the U.S. The prices of natural gas in the U.S. market fell due to the natural gas deposits found in the Southern U.S. in 2008. The discovery of gas deposits led to the fall in natural prices in the U.S. as depicted in the graph below. The graph also shows the increase in gas prices in Japan due to the country's high demand for natural gas.
So what are the growth prospects?
Royal Dutch Shell
The EV/EBITDA shows that Chevron has an attractive valuation compared to its competitors. The high demand for LNG in Asian countries is going to contribute to revenue growth. Also, the PEG ratio, as shown in the table, indicates that Chevron can expect growth from the import of natural gas. This is due to the company's ability to develop its major projects to cater to the growing demand for LNG from Asian countries and the price available in these markets.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Madhu Dube, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.