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Chevron recently announced its 2014 capital and exploratory spending program. It allocated almost 90% of its budget to upstream business while only 8% has been allocated for downstream. It will be interesting to see what the future holds for the company in the wake of its planned capital and exploratory spending program.

At the start of November, Chevron Corporation (CVX) reported earnings of $5.0 billion for the third quarter 2013, compared with $5.3billion during the same quarter of the previous year. The lower earnings were mainly due to higher capital spending. In addition, the company ended the quarter with $18.6 billion in cash and posted an equivalent debt position.

The purpose for the higher capital spending was due to the fact that the company has completed several attractive resource acquisitions. In its latest press release, the company announced a $39.8 billion capital and exploration budget for 2014. The declared budget is approximately $2 billion lower than the expected total investments for 2013.This is mainly due to the development project in Australia, the Gordon project, that is 75 percent complete. The project is estimated to start production in mid-2015.

Source: Capital & Exploratory spending program

The company plans to spend nearly 90% of the declared budget on the upstream crude oil and natural gas exploration and production projects. The company's capital and exploratory spending program clearly exhibits the company's direction and anticipates future growth prospects.

Gulf of Mexico Will Drive Future Growth

The Chevron's focus on its international upstream segment will comprise more than 60% of 2013's CAPEX of $37 billion and ensure that future prospects will be healthy. However, for 2014, the company intends to seek growth opportunities in the upstream business and spend 90 percent of its total spending in the upstream business.

The amendment in Mexico's constitution brings good news for the oil and gas exploration industry. Companies can now have greater access to the country's resources. With that in mind, Chevron announced that two deep water platforms will be constructed and are expected to begin producing oil by the end of next year. For these projects, the company announced that it would invest $12 billion.

The total oil production from these two projects is estimated to be approximately 230,000 barrels of oil per day. These projects, when completed, will increase the company's deep water Gulf production by more than 100%. Currently, the company's per day production is 105,000 barrels.

LNG Projects are in Good Shape

Let us now turn to LNG, where the demand is forecasted to grow to over 440 million tons per year by 2025. With the current LNG capacity and projects in construction, the company needs to bring an additional 150 million tons of LNG production by 2025.That's almost 25 BCF per day of additional inert gas required to meet the LNG demand. To put that into perspective that's over 10 projects, the size of Chevron's Gorgon train development in Australia.

(click to enlarge)

Source: Presentation at Barclays Energy Conference

Shale and tight gas will be a part of this growing supply future. These resources require economic export options and political certainty to realize their potential. The company continues to see shale and tight gas as a viable component of meeting its LNG gas demand and for that reason the company is participating in the Kitimat LNG project in Western Canada.

The company is on its way to building the $4.5 billion Kitimat LNG project and plans to complete it by the end of 2014. The project will initially produce 10 to 11 million tons of LNG, which is scheduled to be imported to fast growing Asian markets. Natural gas prices in export based markets of Asia are many times higher than in North America and although the price mechanism is yet to be determined, it is certain Chevron could bring billions of dollars in deals in the future.

Higher Cash Margin Strengthens the Company's Position

In addition to the higher capital spending the company is well-positioned in the industry. Also, the company's cash margin is the highest among its competitors. Chevron's average realized price for the 3rd Quarter 2013 was almost $97 per barrel of oil equivalent. It is worth mentioning here that the company's per barrel cost of producing oil equivalent barrel is lower than that of its competitor. The lower cost of production per barrel offers a competitive edge to Chevron over other companies within the industry. The figure below exhibits the cash margin of the upstream business of the company in comparison with BP, RDS, TOT and XOM.

(click to enlarge)

Source: Presentation at Barclays Energy Conference

The company's upstream cash margin reflects its ability to conduct efficient business and in my opinion its efficiency to perform as a low-cost operator in the industry is sustainable. Owing to the efficiency of operating assets coupled with the close proximity of assets, the company will continue to progress well.

Final Verdict

Chevron is currently offering a dividend yield of 3.3% coupled with its fabulous history of repurchasing shares. Combining the dividends and repurchased shares, the company is offering a return of 5.5%. Moreover, the company presents itself as an attractive investment due to the current pipeline projects and the company's ability to conduct low-cost operations.

In addition, Chevron's ongoing projects are expected to increase production by more than 25% in the coming years. The increase in production serves as a positive catalyst for the company which is also in line with its long term goals.

Moreover, in comparison with the industry, Chevron seems to be more attractive as its operating and net margins, per share earnings, dividends and cash flow are better. I believe that Chevron, with its operating efficiency and anticipated increase in production, offers attractive returns to not only growth investors but also value investors.

Source: Chevron: A Bull Story