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Summary

  • By using associated gas, the Angola LNG plant offers high returns on capital for Chevron.
  • Chevron has a market cap of $233 billion and the current dividend yield is 3.5%.
  • Though only accounting for 5% of worldwide production, Angola will grow in importance for this energy behemoth.

In an earlier article, I outlined how Chevron (NYSE:CVX) plans to increase capital investment in Canada by furthering the Kitimat LNG plant, and this is proving to be expensive. The cost is due to both the harsh conditions and the demand for skilled labor in British Columbia and Alberta. Chevron is a diverse business with operations globally, so high costs in western Canada or Australia can be offset by production or cost cutting in other continents.

The scope of this article will focus on the Chevron's operations in Angola.

How Big are the Angolan Operations Currently?

Net daily production

2012

2013

Angolan Natural Gas

53 million cubic feet

52 million cubic feet

Total Company Natural Gas Worldwide

5,192 million cubic feet

5,074 million cubic feet

Angolan Liquids Production (crude oil and NGL)

128 thousand barrels

118 thousand barrels

Total Company Liquids Worldwide

1,764 thousand barrels

1,731 thousand barrels

The total worldwide barrels of oil equivalent per day production was 2.6 million. Chevron's Angolan production was 127 thousand BOE/D.

Angola is essentially 5% of production, but due to the big capex outlined in this article, the importance is sure to grow. For context, BP's net production in Angola is approximately 200 thousand BOE/D (net).

Description of Activities

Chevron holds a 39.2% operating stake in Block 0, which produced at an average net rate of 90 thousand BOE/D last year. It also operates the deepwater Block 14 with a 31% stake, from which net production to the company averaged around 27 thousand BOE/D last year. Apart from this, Chevron also holds a 38.1% interest in the Congo River Canyon Crossing Pipeline project that is designed to transport up to 250 million cubic feet of natural gas per day from Block 0 and Block 14 to the Angola LNG plant. The pipeline project is expected to be complete in 2015.

Chevron expects the global LNG demand to double by 2025, creating a supply shortfall of around 150 MTPA. Chevron aims to be a leader in LNG in the next two decades, and has a robust portfolio of LNG projects around the world. The company has shipped the first LNG from Angola in 2013, although news reports this week indicated that this project will be out of commission until mid-2015 due to operational issues.

Natural Gas Commercialization

Natural gas commercialization efforts in Angola are expected to monetize a total potentially recoverable resource of more than 3 trillion cubic feet of natural gas and 130 million barrels of liquids through export sales of LNG and NGLs.

Angola LNG (ALNG)

The plant is a 5.2 million metric ton per year LNG plant with capacity to process 1.1 billion cubic feet of natural gas per day. When running at capacity, Chevron expects average total daily sales of 670 million cubic feet of natural gas and up to 63,000 barrels of NGLs. This is the world's first LNG plant supplied with associated gas, where the natural gas is a by-product of crude oil production.

The most important aspect of ALNG is that the gas is supplied from offshore oil fields where the gas would normally be flared. The project has economics once operational again as new wells do not need to be drilled. As this project is the only LNG plant in the world supplied with associated gas, issues are certain to arise. For example, the feedstock is sourced from multiple fields and operators, and supply to the LNG plant might face seasonal issues. Chevron's focus on safety ensures that the ALNG plant will be world class and safe when operating at capacity.

The first LNG shipment from the plant occurred in second quarter 2013. Commissioning and testing of the plant continued through the end of 2013. Due to the variability in the associated gas that supplies Angola LNG, the plant is expected to operate at approximately 50 percent of capacity until permanent plant modifications are completed in 2015, allowing Angola LNG to consistently produce at full capacity.

Total daily production in 2013 averaged 83 million cubic feet of natural gas (30 million net) and 2,000 barrels of NGLs (1,000 net). The anticipated economic life of the project is in excess of 20 years.

ALNG is estimated to cost a cool $10 billion.

COP Technology Utilized in ALNG

ConocoPhillips (NYSE:COP) has a license agreement with Angola LNG Limited for the application and use of ConocoPhillips' proprietary natural gas liquefaction technology. The agreement provides a license to utilize the ConocoPhillips Optimized CascadeSM Process in the development of ALNG.

The ConocoPhillips Optimized Cascade Process has proven itself throughout its 40+ years of operation at ConocoPhillips' Kenai, Alaska LNG liquefaction facility. In addition to the Kenai facility, the ConocoPhillips Optimized Cascade Process is currently employed in Trinidad (four trains); Egypt (two trains); Darwin, Australia; and Equatorial Guinea.

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%.

Disclosure: I am long CVX, COP. 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: Angola: A Jewel In Chevron's Crown