Chevron Corporation (NYSE:CVX) is the world's largest private producer of crude oil. Though the company's main focus is on its upstream business, it also has indulged in a wide array of downstream activities including marketing, transportation, and refining businesses.
Weaker Q4 2013 Performance; Future Prospects Still Bright
Earnings for the quarter stood at $4.9 billion and diluted EPS at $2.57. From the previous year's earnings of $7.2 billion the diluted EPS was $3.07. Full year earnings also saw a drop from $26.2 billion in 2012 to $21.4 billion in 2013.
Earnings from the downstream segment were $265 million in Q4 2013 compared to $331 million in Q4 2012 due to lower refinery margins attributed to the lower crack spreads and higher maintenance costs in 2013. The upstream business also exhibited restricted growth with normal field declines and lower cost recovery volumes. As a result, Chevron's upstream earnings dropped by $560 million to a figure of $803 million for Q4 2013. All in all volumes fell by 4% in the 4th quarter of 2013 to 650,000 bpd.
The downstream segment was impacted by lower average realized prices for oil which declined from $91 in Q4 2012 to $90 in Q4 2013 while average prices for gas also fell from $3.35 in the previous year to $3.22 in Q4 2013.
Huge Reserves to Enable Steady Progress in Upcoming Year
Chevron has large reserves of oil that indicate good prospects for the business in the foreseeable future. Chevron's diverse portfolio is spread out through a network of oil and gas fields across the globe. Unlike other big players in the oil exploration industry, its exploration and production (E&P) activity is focused on international ventures with ~1,869 million BPD outside North America. However, it does not ignore the high potential of the U.S. market associated with the current shale boom and maintains adequate reserves of ~728 million BOED in its home region. In the coming year, it has also allocated around $8 billion for projects in this region.
Hefty Capital Expenditures Planned for 2014
The capital expenditure for the coming year is going to exceed Chevron's biggest competitor Exxon Mobil (NYSE:XOM). Chevron has announced a capital expense of $40 billion in 2014 which is more than Exxon's expense of $38 billion. Presently, Chevron has 50 projects planned that will aid the company in reaching its 2017 target of raising its volumes by 25%. Chevron is adding much more capital in its growth projects than Exxon even though Exxon is twice the size of Chevron in terms of revenues and produces much larger volumes of oil.
Developing the Upstream Segment
Refining is a volatile business and is largely dependent on the commodity movements. This generates unreliability in the company's cash flows and a fear in many risk-averse investors. The realization of this fact has led to the company's shift towards its E&P business rather than its downstream activities. This is why out of the expected capital expenditure of $40 billion in 2014, 90% will be spent on the company's upstream business.
Higher Demand Outlook to Benefit Oil Producers
Oil demand is expected to grow at ~23 % by 2035 and Chevron needs to rapidly increase its output by ~65 million BPD by then to satisfy the growing demand. The EIA also forecasts a growth in natural gas demand of 43% by 2035. This will create a favorable outlook for Chevron due to higher product margins in their refining segment.
New Projects to Boost Volumes
Papa - Terra Field Begins Production
In November 2013, the Papa-Terra field started oil and gas production. This field is expected to produce 140,000 bpd of crude oil. Chevron has a 37.5% stake in this project and runs the field with Petroleo Brasileiro S.A which is a state-run energy company in Brazil.
Gorgon and Wheatstone to Begin Production in 2015 and 2016
The Gorgon and Wheatstone natural gas projects in Australia are also on schedule and are expected to start production in 2015 and 2016, respectively. Gorgon is ~75% complete and will require large capital expenditure in 2014 to prepare it for its initial production in the beginning of 2015. Chevron currently has a 47.5% stake in the Gorgon LNG project while Exxon and Royal Dutch each have a 25% share.
Deepwater Projects in the Gulf of Mexico
The company's deep water projects in the Gulf of Mexico will commence production by the end of next year. Jack/St Malo has a production capacity of 177 MBOED while Big Foot has a production capacity of 79 MBOED. Tabular Bells will also initiate production in 2014 with a capacity of 60 MBOED. Further the company believes it can augment its volumes by more than 100,000 bpd due the shale boom in the U.S.
Chevron is also spending heavily on the Caspian pipeline expansion and the Tengiz future growth and Wellhead Pressure Management Project in Kazakhstan. Other projects under development are the Usan and Agbami Deepwater projects in Nigeria, the Kitimat LNG Project in Canada, the Mafumeira Sul and Moho Nord in Angola, the Vaca Muerta shale in Argentina and the Clair Ridge and Alder project in the UK.
The Investment Outlook
Investors may be wary of the large capital expenditure of Chevron worth $40 billion in 2014. With this large outlay, shareholders may not be ably compensated in the coming year. These doubts cannot be disregarded. However, over the longer span, the steady performance of the company and its lucrative new project pipeline give the stock a great upside potential. The company is heavily investing in improving its infrastructure to develop its exploration and production activities. There is an evident shift from the more volatile refining business towards the company's upstream activities. This can be taken in good light as it will provide the company with sturdy and predictable cash generation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by a Blackstone Equity Research research analyst. Blackstone Equity Research is not receiving compensation for it (other than from Seeking Alpha). Blackstone Equity Research has no business relationship with any company whose stock is mentioned in this article.