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Summary

  • Chevron plans to spend $40 billion per year for the next few years in order to boost its relatively flat production with 2014’s budget allocated heavily towards the Gulf of Mexico.
  • The spending program is expected to give a boost to daily production by 27% to 3.3 million barrels of oil equivalent per day by the end of 2017.
  • Continued investments in the company's core upstream assets, including the Gulf of Mexico, should keep production and cash flow going in the right direction.

The market conditions for oil and gas companies have been tough. The companies have been experiencing lower production from existing fields. The situation worsens when they have to spend higher than expected expenditures for the development of new fields. As a consequence, the companies have been forced to post lower revenues and decrease production. While addressing the issue, Chevron (NYSE:CVX) is determined to stick to its previous strategy. It plans to keep spending $40 billion per year for the next few years in order to boost its relatively flat production.

There has been a lot of talk about Chevron's growth through 2017 as the company has a number of huge projects coming online during the next few years. These include the Gorgon and Wheatstone liquefied natural gas developments in Australia and the Jack/St Malo, Big Foot, and Tubular Bells deep-water oilfields in the Gulf of Mexico. In total, these projects will add 500,000 barrels per day to Chevron's existing production. The figure below demonstrates the company's upstream assets all around the world.

(click to enlarge)

Source: Investor presentation

Much of the company's 2014's budget is allocated heavily towards the company's operations in the Gulf of Mexico. Chevron's Gulf of Mexico operations are primarily focused on two key regions: shelf and deep-water. The total Gulf of Mexico production is currently split between the two. The company's shelf production totaled 105,000 barrels of oil equivalent per day while the deep-water production was 111,000 barrels per day last year. The company's Gulf of Mexico production is currently even between shelf and deep-water and is pursuing shifting its production towards deep-water production in the years ahead.

There are a number of specific projects set to contribute to the mainstream over the next two years. Currently, Chevron has four operational deep-water drill ships with the fifth ship to be added soon. Similarly, the company is expected to add a sixth ship in 2015. In addition, the company also expects its Jack/St. Malo region to begin producing oil and gas in 2014. Production capacity is expected to be 177,000 barrels of oil equivalent per day.

In the Gulf of Mexico, Chevron also expects to begin production at Big Foot in the next year. The company has been progressing well in the region as it already has two pre drilled wells. Production capacity at Big Foot stands at an estimated 79,000 barrels per day.

The company believes that the major projects coupled with the ongoing operations in the Gulf of Mexico will enhance production. However, there are certain projects that are faced with complications. Back in November 2012, the company suspended its investment on the $10 billion Rosebank Project saying that the rising cost is making the project economically unattractive. The project has caused the company to suspend investments on its $10 billion Rosebank project.

The Australian Gorgon project was also faced with the dilemma of rising costs. The latest estimated cost is $54 billion which is $2 billion higher than 2012's estimates and $17 billion higher than the original cost estimates at the start of the project. The project is one of the world's largest natural gas projects and the company expects the first shipment of LNG from the project in early 2015.

Conclusion

Chevron has been spending a lot of money on a couple of projects and this will eventually grow its production and revenues but the cost of these projects kept rising. The estimated spending by asset class can be seen in the chart below.

Source: Investor presentation

Going forward, the company is expecting to post strong results from its exploration and production activities since a full 90% of Chevron's $40 billion 2014 capital expenditure budget has been allocated towards its upstream crude oil and natural gas projects. The spending program is expected to give a boost to daily production by 27% to 3.3 million barrels of oil equivalent per day by the end of 2017.

Continued investments in the company's core upstream assets, including the Gulf of Mexico, should keep production and cash flow going in the right direction. After the recent dip in the stock price, the company is now trading at a dividend yield of 3.71 that is supported by a payout ratio of 36 percent. Going forward, with the current payout ratio, the company will be able to reward shareholders with higher dividends and stock repurchases. Therefore, I recommend buying the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Chevron's Long-Term Growth Prospects Are Alive