Chevron (CVX) has been on a roll of late with several new international opportunities. Chevron has been battling weaker oil and natural gas prices, but the important portion of the equation is that future exploration and drilling can take place in market areas of the world that have not been over supplied by natural gas, in particular Asia, Europe and Latin America.
New Opportunities in International Contracts May Propel Chevron Higher
Chevron is one of 16 interested groups that placed a bid for a second round of contracts to produce oil in 22 areas, primarily older fields believed to have the ability produce an additional of 140 million barrels per day (bpd) doubling the current production of 130 million bpd. The 22 older fields are located within 6 areas in the Mexican states of Tamaulipas and Veracruz. Four of the areas are onshore and 2 areas are located in shallow water. The Mexican government and Pemex will award contracts on June 19, 2012. The contracts will be awarded to the company that can produce the most bpd at the lowest price per barrel.
Pemex believes the winner of the contract will contribute $215 million in the first two years. Pemex is the seventh largest producer of oil in the world and has finally stabilized operations and output at roughly 2.5 million bpd.
The Mexico government and Pemex are now allowed to seek outside invest after Mexico's 2008 oil reform law which called for opening the nationalized industry for the first time since the 1930s. Mexico also has an estimated 29 billion barrels of crude but this oil is in deep waters. Pemex plans additional contracts for deep water as well but major oil companies like also believe a second generation of oil reform to provide more incentives. Currently foreign companies are paid on the profitability of the field and the oil reserves remain the property of Mexico. The 22 fields that the 16 companies are bidding on have a proven reserve total of about 220 million barrels with total prospects of resource in the areas are estimated at 1.6 billion barrels of oil equivalents.
In Europe, Chevron and Shell (RDS.A) have been granted permission to develop two big shale gas fields, one in the western region of Lviv and the other is in the eastern areas of Donetsk and Kharkiv. Chevron and Shell out bid other competition including a Russian oil company. Chevron will develop the fields using hydraulic fracture methods that have been controversial in some European companies such as France where fracking is illegal. It is believed by the U.S. state Energy Information Administration that Ukraine has the third largest shale gas reserve after France and Norway.
Chevron and General Electric (GE) have started to take the first steps with the United States government to invest in the tiny country of Myanmar, which is located between China and India. GE has applied to obtain a license to operate in Myanmar and has talked with the Myanmar government about supplying portable gas turbines.
Chevron, on the other hand has had a contentious stake in Yadana gas field in the Andaman Sea offshore of Myanmar and Chevron also has a 249-mile natural gas line but is currently unable to enlarge its presence because of U.S. sanctions against Myanmar. This might change in the near future as the U.S. is expected to ease restrictions on trade with Myanmar and this will help Chevron develop more of the existing pipeline. Also in April 2012 the U.S. agreed to send a full ambassador to the country after sweeping elections of Aung San Suu Kyi and the National League for Democracy party.
Chevron's play in Myanmar is a partnership with French petroleum giant Total (TOT) is located in the Andaman Sea. The easing of sanctions could not come soon enough since Myanmar recently has auctioned off 10 onshore oil and gas permits in which no U.S. company was able to bid on the permits because of current export sanctions placed on Myanmar. Myanmar is an upcoming oil and gas giant with approximately 11.8 trillion cubic feet of natural gas and over 200 million barrels of oil equivalents.
In March 2012 Chevron believed it could increase production by some 20% from its Australian operation, where the Gorgon and Wheatstone field is expected to help satisfy the growing demand in Asia. Chevron is the dominate player in Gorgon with a 47% stake followed by Exxon Mobil (XOM)'s 25%, Shell owns 25% and three Asian based companies hold the remaining stake. At Wheatstone, Chevron again is the premier player with Apache (APA) holding 13% and Shell holding 6%. Chevron is not worried about bringing more liquefied natural gas to market from Australia because with Asia demand LNG prices are still robust. Currently in the U.S. the price for natural gas is around $2.50 and in Asia the price is around $18 per British thermal unit.
Also let us not forget the overall 13.7% return (including dividend) that Chevron has brought to investors since 1980. Chevron has outpaced the S&P 500 by almost 3% per year over this same time frame. Chevron's strong dividends during this time frame have accounting for 75% of the total return and Chevron is currently offering a dividend of $3.60 per share. Chevron has been able to grow earnings on average of almost 20% since 1995 and the company offers stability and a decent valuation of 7.5 times earnings which are expected to be in the $13.14 range for fiscal 2012.
Chevron keeps going even with oil prices stuck in a bear market right now due to the European affect and slower expected growth in the future. Unfortunately this has had a reflection on Chevron's future quarterly growth and analysts have recently lowered its quarterly per share earnings to account for the lower price of oil and natural gas. I think with an average target price of $123 per share an investor could easily see a nice return on their investment with the stock at its current $101 price level. With a stunning 23% upside potential and a 3% dividend yield you would have to be crazy not to want to take advantage of that situation.