Seeking Alpha
Value, growth at reasonable price, long/short equity
Profile| Send Message|
( followers)

Summary

  • If Chevron sells all the LNG that its export facilities can produce, the company could see another $14.4 billion in revenue.
  • Chevron is signing purchase agreements with many Asian companies to lock in current LNG prices which are currently very high.
  • There are several downside risks that involve the Canadian labor shortage and rising costs to construct the facilities.

Liquefied natural gas (LNG) is in high demand in Asian countries. To fulfill this demand, Chevron Corporation (NYSE: CVX) has begun building three different LNG plants. Because the increased demand has forced LNG prices so high in Asian countries, Chevron's investments in these plants will pay off once LNG starts shipping from these three new facilities.

If prices remain consistent with where they currently sit, Chevron could see about $14 billion a year in revenue from these three LNG facilities.

Kitimat LNG

The Kitimat LNG Project is located in Canada in the province of British Columbia. Once completed, this 10 million metric ton per year facility will be able to service the Asia-Pacific region. Chevron and Apache Corporation (NYSE:APA) are currently marketing the LNG that will eventually ship from the facility.

The output of the facility once completed is expected to be 10 million metric tons of LNG per year, which is equivalent to 517 million MMBTUs (a conversion rate of 1 to 51.7). At current prices, the projected output of Kitimat LNG is worth $8 billion. Chevron will likely only see 50% of that revenue because the company owns that amount of equity in the project. The company's share of equity in the project will leave the company with around $4 billion.

Facility Output

10 million metric tons

Converted Output

517 million MMBTUs

Total Revenue at the Current Price ($15.5 / MMBTU)

$8,013,500,000

Chevron's Revenue (50%)

$4,006,750,000

Chevron and Apache have not yet announced any LNG purchase agreements. The project is expected to be finished sometime between 2017 and 2020.

Although a possible $4 billion in revenue might sound fantastic to shareholders, there are a few risks related to the Kitimat facility.

According to Reuters, the Kitimat facility might fall victim to a shortfall of skilled workers. There are many ongoing LNG projects in the province of British Columbia and the shortfall of skilled workers needed to fulfill these projects could be around 12,000.

Chevron and Apache aren't the only companies to face this problem. Royal Dutch Shell (RDS.A, RDS.B) is also active in British Columbia with various LNG projects. The president of Shell's U.S. subsidiary says the project can't move forward "until there's some clarity on the workforce issues and labor availability."

With the worker shortage looming, the province of British Columbia is scrambling to train enough workers to keep up with the LNG industry's demand. In order to meet demand, the province plans to train 24,000 to 27,000 workers, 11,000 to 12,000 of those being skilled workers.

If the workers aren't trained in time, Apache, Chevron, and Shell's projects might be pushed back.

Gorgon LNG

Chevron's Gorgon Project is located off the shore of Australia on Barrow Island. When finished, the plant will be able to ship 15.6 million tons of LNG per year.

If all 15.6 million tons are sold, the facility will bring in about $12.5 billion - Chevron will likely see about $5.9 billion.

Facility Output

15.6 million metric tons

Converted Output

806.52 million MMBTUs

Total Revenue at the Current Price ($15.5 / MMBTU)

$12,501,060,000

Chevron's Revenue (47.3%)

$5,913,001,380

Even though the facility is not operational yet, Chevron has already signed purchase agreements with many Asian customers. These purchase agreements will account for 4.8 million metric tons of the 15.6 possible.

Locking in current prices will allow Chevron to hedge against possible downturns in the price of LNG. Asian LNG prices are very high right now compared to the rest of the world. As the demand for LNG starts to be filled, prices will gradually fall. Locking in contracts when prices are high will allow Chevron to maximize revenue and bring in more than what they otherwise would if the company waited until the plant was operational.

The project is still several years out from completion. The Gorgon facility is expected to be operational in mid-2015. However, once operational, the facility is projected to have a life span of 40 years.

Exxon Mobil (NYSE:XOM) is also set to benefit from the LNG sold through the Gorgon Project in Australia. The company owns 25% of the Gorgon Project and will therefore receive approximately $3.1 billion.

In regard to becoming part of the Gorgon Project with Chevron, Exxon's Senior Vice President Andy Swinger said the company is "capitalizing on world class experience, technological capabilities and our LNG marketing expertise as we progress a number of exciting new opportunities to grow our LNG portfolio."

Royal Dutch Shell also owns 25% of the Gorgon Project and will receive the same amount as Exxon Mobil assuming all the LNG is sold.

Just like with the Kitimat facility, there are some risks involved in building Gorgon LNG.

Shell recently cast some doubts on the completion date of the Gorgon Project. Shell's CFO Simon Henry said production will likely be delayed until 2016 and possibly not even start until 2018. Chevron has not commented on Shell's comments.

Reuters reports that the project's costs have soared 46% to $54 billion. This increase in cost came from an increase in the workforce from 30,000 to 90,000 from early 2010 to mid-2013.

If costs keep increasing and management doesn't keep them in check, the pay off for this investment will be much less significant.

Wheatstone Project

Chevron's Wheatstone Project is also located in Australia. The LNG plant for this project will be located on the shore of the northwestern coast of the country, only about 150 miles from the Gorgon plant.

When finished, the Wheatstone facility will produce 8.9 million metric tons of LNG per year. If all of the LNG produced is shipped to customers in Asia, the facility will bring in about $4.5 billion a year for Chevron.

Facility Output

8.9 million metric tons

Converted Output

460.13 million MMBTUs

Total Revenue at the Current Price ($15.5 / MMBTU)

$7,132,015,000

Chevron's Revenue (64%)

$4,564,489,600

Chevron already has LNG purchase agreements in place for the Wheatstone Project. Both TEPCO and Chubu, both Japanese power companies, have signed sales agreements for 4.1 million tons per year. As a result, nearly half (46%) of all the LNG which will be produced by the project, has been sold.

Like all the other projects, the Wheatstone facility is still several years out from completion. Production is scheduled to begin in 2016.

Shell also owned an 8% stake in the Wheatstone LNG project but recently announced it sold its stake to Kuwait Foreign Exploration Petroleum Company $1.1 billion.

Chevron's $14.4 billion revenue boost

Once these three facilities are shipping LNG, Chevron should see approximately $14.4 billion in revenue increase per year. Of course, this assumes that the contracts that Chevron will sign with energy companies will be sold at $15.5 / MMBTU, and that the plants will sell out all capacity.

As long as these projects keep on track and Chevron continues to sign purchase agreements with Asian companies, investors have a great reason to be optimistic about the coming boom in revenue.

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

Source: How Chevron Could Make Up To $14.4 Billion In Extra Revenue