Chevron (CVX) shareholders are growing nervous as oil prices fell throughout the month of May. The Brent crude oil spot price started the month at $119.57 per barrel on May 1, falling to $111.40 on May 15, a 7% decline. Most of Chevron's production is oil as Chevron largely ignored the natural gas rush. While Exxon Mobil (XOM) became the largest producer of natural gas in the U.S. after its 2010 acquisition of natural gas player XTO Energy and Royal Dutch Shell (RDS.A) snapped up around $11 billion in leases on North American natural gas plays, Chevron limited its U.S. based natural gas expenditures to its 2011 acquisition of Atlas Energy. Now that the rush has depressed U.S. natural gas prices to unprofitable levels, Chevron is looking prescient. However, it did not stay out of natural gas all together.
Its world class Wheatstone liquid natural gas project in Australia is doing incredibly well this year. Just recently Chevron scored another win with the project, as Japan scales down its reliance on nuclear power after the 2011 Fukushima Daiichi disaster. As a result, Chevron's Wheatstone now has 80% of its production committed. Apache (APA) is also set to rise higher on these deals, as it owns a 13% interest in Wheatstone.
Tentatively Exploring the Ukraine
Earlier this week, Ukrainian President Viktor Yanukovych made several high profile remarks about Chevron, seizing an opportunity in the spotlight at the 2012 NATO Summit. In his remarks, Yanukovych indicated that the Ukraine has a favorable investment environment for shale gas producers, and specifically named Chevron as a hope for a partner in these ventures. Yanukovych later met with Stephen Greenlee, President of Exxon Mobil Exploration Company and Vice President of Exxon Mobil, to sign a "memorandum of cooperation" between Exxon Mobil Exploration Company and the Ukrainian Ministry of Environment and Natural Resources. Greenlee was an appropriate choice to represent Exxon Mobil at the meeting as his previous experience includes supervising operations for Exxon in Western Siberia and Kazakhstan.
So far, none of the players are committing to huge expenditures in the Ukraine, with announced investment plans amounting to $370 million for shale gas exploration, divided between Chevron and Shell. Shell may invest up to $800 million between shale natural gas and other energy production measures in total. BP (BP) is also participating in the Ukrainian exploration through its Russia-based partnership in TNK-BP. British competitor Cadogan Petroleum is the most active outside player in the Ukraine, with several fields and areas of operation within the country. However, its operations have been marred by setbacks, including poor exploration results, lower than anticipated production, and higher than anticipated costs.
The Ukraine produces about 20.26 billion cubic meters of natural gas per year, 31st in the world with proved natural gas reserves of 1.1 trillion cubic meters, 24th in the world. By both measures it places it behind other countries where Chevron is producing, such as Australia, the United Kingdom, Nigeria, and the U.S.
Analysts are speculating that the Ukraine's overtures to Western oil and gas giants are based in its desire to be less dependent on the current Russian energy monopoly held by OAO Gazprom. As Gazprom supplies the Ukraine with natural gas at costs amounting to 10% of the Ukraine's total annual GDP, it's easy to see why relative independence for this Eastern European country looks attractive.
In my opinion, the problem here is that the Ukraine's close ties to Moscow will not disappear simply because the country looked elsewhere for some of its energy needs. Though the Ukraine owns and operates its own pipelines (which is the source of the price dispute with Gazprom), it was only twenty years ago that the Ukraine was created out of the breakup of the Soviet Union. The Ukraine and Russia are locked in a continuous power struggle, as the Ukraine attempts to define itself as an independent nation and Russia uses its far more impressive political and capital weight to coerce the Ukraine into agreements that are more favorable to the Russian government - as with the Gazprom dispute.
Russia's close proximity to the Ukraine and its history of entering into international military conflicts to protect its stances, most recently in 2008, may be one of the reasons that Chevron, Exxon Mobil, and Shell are not rushing headlong into Ukrainian opportunities. I think that this and its other disputes with Russia make it a less attractive proposition than other potential plays, though as reserves in other areas are depleted and advances in shale gas extraction improve the Ukraine might have a better chance at competing on the world stage as an energy exporting nation.
On the Legal Front
Chevron is enduring litigation in Brazil related to the accidental release of an estimated 2,400 barrels of oil into the seas off the coast from the Frade field in early November 2011. The exact circumstances that caused the small spill are unclear, but Chevron confirmed that the blowout preventer on the leaking well worked as it should and cut off the source of the oil, completing the clean up and response within just four days. A month later, prosecutors for the Brazilian government hit Chevron with an $11 billion suit over environmental damage, later raising the amount sought to $22 billion. Watching this case I see much back and forth between Chevron and the Brazilian government and prosecutors, and it is difficult to predict the case's true risk to Chevron at this point in time. However, due to the size of the litigation and the judicial system under which it is taking place, there is a potential for Chevron to suffer an enormous loss on its books.
Analysts are seeing signs of a rebound in U.S. natural gas prices, as several months of unusually mild weather nationwide slide into a summer showing signs of leading to high energy demand. Though Chevron's continued financial health is not dependent on U.S. natural gas, any rise here would be positive for the company due to its holdings. A rise could also prompt more serious exploration in the Ukraine; although European natural gas prices stayed healthy throughout the U.S. market's turmoil, a rise here could influence a rise across the Atlantic.
What will be more interesting to watch is how much commitment Chevron's Wheatstone project will achieve, and how soon. If the project's commitment levels on production rise much higher, I foresee a rush to natural gas in Australia for those companies currently struggling here in the U.S., Chesapeake Energy (CHK) (or at least, its CEO Aubrey McClendon- Chesapeake is too financially hamstrung to operate outside the U.S.) and Anadarko Petroleum (APC) included. Chevron has an advantage in this regard as it already possesses the knowledge and contacts needed to further develop natural gas on the far southern continent, and the financials to continue progressing.
Chevron is trading around $97 per share with a low price to book of 1.5 and a forward price to earnings of 7.2, indicating that the shareholders are acting overly cautious with Chevron. As Chevron is wavering just above its 1 year resistance level, opportunist investors can feel comfortable adding Chevron as a dividend stock with huge growth potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.