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Summary

  • Canada is currently a small piece of the Chevron portfolio.
  • Chevron and Apache must make a final investment decision on the Kitimat LNG project.
  • Labor costs can make up about half the construction budget of a typical LNG plant.
  • Investors are already concerned about cost overruns at the Gorgon LNG project in Australia.

After researching ConocoPhillips (NYSE:COP) and their efforts in Canada, I turned to a larger integrated player: Chevron (NYSE:CVX). In 2013, the Canadian upstream operation was a small part of the overall enterprise. However, two large projects with start dates around 2017 should change this dynamic. These projects include Hebron and Kitimat LNG.

The scope of this article is the current challenges faced by the latter project: Kitimat LNG.

How Big are the Canadian Operations Currently?

Net daily production

2012

2013

Canadian Natural Gas

4 million cubic feet

9 million cubic feet

Total Company Natural Gas Worldwide

5,192 million cubic feet

5,074 million cubic feet

Canadian Liquids Production (crude oil, synthetic oil, NGL)

68 thousand barrels

70 thousand barrels

Total Company Liquids Worldwide

1,764 thousand barrels

1,731 thousand barrels

Net daily production in 2013 from Canadian operations was 27,000 barrels of crude oil, 9 million cubic feet of natural gas and 43,000 barrels of synthetic oil from oil sands.

The total worldwide barrels of oil equivalent per day production was 2.6 million.

Hibernia and the Athabasca Oil Sands Project

Off the east coast of Newfoundland and Labrador, Chevron has a 26.9 percent non-operated working interest in the Hibernia Field with average net daily crude oil production in 2013 of 27,000 barrels. The production platform is specially built to withstand blows from large icebergs. The development includes wells that reach up to 4.5 miles (7.2 km) in length and are drilled to a depth of almost 13,000 feet (3,960 m).

Chevron has a 20 percent non-operated working interest in the Athabasca Oil Sands Project (AOSP) near Fort McMurray, Alberta. In 2013, average total daily production increased to 236,000 barrels (43,000 net) of synthetic oil.

The company is also involved in the proposed Kitimat liquefied natural gas (LNG) and Pacific Trail Pipeline projects in British Columbia.

Kitimat LNG

In February 2013, Chevron acquired a 50 percent-owned and operated interest in the Kitimat LNG project and proposed Pacific Trail Pipeline and acreage in British Columbia. Plans for the Kitimat project call for an LNG facility with two processing units capable of producing 10 million metric tons of LNG per year.

The Challenge: Expensive Labor and Increasing Demand for Labor

The oil sands projects in Canada (including the Kearl project operated by Imperial Oil (NYSEMKT:IMO)), and nearly $50 billion for Canada's first network of natural gas export terminals face an enormous challenge: finding the workers to build them. CVX will need as many as 5,500 workers to build the Pacific Trail Pipeline across Canada's western mountains and a plant on the country's frosty Pacific Coast for shipping gas to Asia. Chevron's site is located near one of western Canada's snowiest communities, Kitimat, British Columbia, which is beset with 424 centimeters (14 feet) of snow that drop on average each winter, Environment Canada data show. Partly due to the harsh conditions, oil and gas drill operators, for example, can earn C$45 ($42 US dollars) an hour in Canada, compared to $29.50 for the same job in Texas.

Investors want to prevent the spiraling labor costs that have contributed to a cost overruns at Chevron's Gorgon LNG project in Australia. Chevron and its partner, Apache Corp. (NYSE:APA) have not made a final investment decision on the project.

In the oil sands region of Alberta, more than 70,000 people live in work camps and the cost to house a person in Canada has risen to about C$200 a day as housing is more like hotels than dorms. Labor costs can make up about half the construction budget of a typical LNG plant.

Conclusion

I conclude that Chevron can still earn $13 per share in FY 14 given the strong production in the Gulf of Mexico, Africa and the strength of CP Chem. With the stock around $123, and a Trailing Twelve Month P/E ratio of 12x, the stock represents good value. I would Accumulate on any weakness. The stock also yields 3.5%.

While the Canadian operations are now small, the Kitimat LNG plant could provide an avenue for growth. The final investment decision depends on having 60 to 70 percent of the LNG under long term sales arrangements.

Disclaimer

The above article is the opinion of the author and does not represent investment advice.

Disclosure: I am long CVX. 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: LNG, Canada And The Labor Shortage