Chevron: This Is A Big Opportunity

| About: Chevron Corporation (CVX)

Summary

Though CVX’s Gorgon LNG project has run into a speed bump due to a technical failure that will be rectified within 60 days, investors should not miss the long-term picture.

CVX is all set to benefit from the LNG market since the opportunity over here is huge, with demand expected to double in the coming 15 years.

However, not enough LNG supply will come online to support the increasing demand, which is good news for CVX as prices will improve.

CVX is building assets in the heart of the global LNG market, i.e. Asia, which will account for 70% of global LNG imports by 2030.

CVX’s Gorgon and Wheatstone LNG projects, with a combined capacity of almost 25 mtpa, will allow it to tap the growing demand for LNG in Asia in the long run.

In an article on Chevron (NYSE:CVX) last month, I had advised why investors should continue to remain invested in the stock as its upstream business looked set to improve in the long run. But, earlier this week, Chevron announced that it is being forced to temporarily shut down its Gorgon LNG plant in Australia due to mechanical problems.

Now, Chevron owns 47% of the Gorgon project, and since the plant will be unable to produce any LNG for the next 30-60 days, the company's prospects in the LNG market will take a hit. However, the good thing is that Chevron believes that the repair work required at the plant is of routine nature, and it won't be difficult to ramp up the Gorgon project to full capacity in the next 6-8 months.

In my opinion, investors should not miss the opportunity presented by Chevron's LNG business as the company is well-placed to tap an end market that's set to grow at an impressive pace in the long run. Let's take a look at the reasons why the LNG business will prove to be a growth driver for Chevron.

A huge end market opportunity

Though the market for liquefied natural gas is in oversupply mode at present, investors should not forget that the dynamics of the market will improve in the long run. This is because LNG demand is all set to boom over the next 15 years and there won't be enough supply present in the end-market to satisfy the demand.

In fact, as forecasted by U.S. LNG supplier Cheniere Energy (NYSEMKT:LNG), the demand for LNG across the globe will double by 2030 as compared to last year. But, at the same time, LNG supply will start waning post 2020 as a combination of the infrastructure already in place and the infrastructure being constructed will not be enough to match the growing demand. This is shown in the chart given below:

Click to enlarge

Source: Cheniere Energy

As seen above, new supply of around 180 mtpa will be needed in the long run to satisfy the end-market demand. This will lead to an improvement in the price of LNG in the long run and help Chevron improve its upstream business further. More importantly, Chevron has already put the infrastructure in place to make the most of the growth in the LNG market, and it will continue to expand its infrastructure so that it can increase liquefaction capacity.

Chevron's assets will help it tap the end-market demand

As mentioned earlier in the article, Chevron is busy ramping up the Gorgon project and expects to achieve full capacity from Train 1 in the coming 8 months. Now, apart from Train 1, Chevron is also constructing another two trains at Gorgon, which will take its overall liquefaction capacity to 15.6 metric tons per year.

Now, Gorgon is not Chevron's only LNG project in Australia. Apart from Gorgon, the company is invested in the Wheatstone project as well, which is expected to achieve first LNG by the middle of next year. Chevron owns 64% of the Wheatstone project, which means that in combination with Gorgon, it will become the largest supplier of LNG in the Asia-Pacific. At present, the company is working on the construction of two LNG trains at this project, which will have a liquefaction capacity of 8.9 mtpa.

What's even more interesting is that 85% of the Wheatstone Project's LNG has already been sold to buyers. This is not surprising as Asia is expected to be one of the biggest LNG markets in the long run, and this is good news for Chevron investors since both the Gorgon and Wheatstone projects will enable it to tap the growing Asia-Pacific market. The following chart indicates the extent to which demand for LNG is expected to grow in the Asia-Pacific region:

Source: Chevron

Thus, as shown above, Asia will account for 75% of LNG imports by 2030, and Chevron is well-placed to make the most of the opportunity in this market on the back of the Gorgon and Wheatstone projects.

Conclusion

Chevron is focusing on the right areas in the LNG market from a long-term perspective. It is enhancing its capacity at Gorgon and Wheatstone, which is a smart move considering the expected growth in demand for LNG in the Asia-Pacific region. So, apart from a potential improvement in oil prices, improving dynamics of the LNG market will prove to be another tailwind for Chevron in the long run.

Disclosure: I/we 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.