Unlike many of its peers, Chevron (CVX) is avoiding heavy revenue cuts brought about by lower natural gas price realizations. It is insulated by its size, to be sure, but is also benefiting from a measure of foresight regarding the price depression and a few smart moves internationally.
In the second quarter, its average sales price of natural gas in the U.S. was $2.17 per tcf, compared to $4.35 in the second quarter last year. The nearly fifty percent drop is partially offset by strong international natural gas sales, since its international natural gas realizations actually rose, from $5.49 per tcf in the second quarter of last year to $6.10 per tcf in the second quarter of this year. It is further offset by less U.S. natural gas production, which Chevron reduced in the second quarter of 2012 quarter over the second quarter of 2011 by about 9%, from 1,299 mmcf per day to 1,186 mmcf per day. Due to inventory accumulated over the past year, Chevron's total sales were essentially flat year over year, at 5,314 mmcf per day in the most recent quarter ended compared to 5,724 mmcf per day in the same quarter of last year.
This avoidance of steep revenue drops tied to natural gas is one reason it did so well in the second quarter- Chevron's second quarter revenues came in just 11% below its revenues from the same quarter a year ago, at $60 billion compared to $67 billion, a much gentler slide than seen by most of its competitors. Chevron Chairman and CEO John Watson acknowledged the strong earnings, noting that "despite current weakness in the global economy, we continue to invest in our long-term growth projects to help deliver affordable energy to meet future demand." Could part of that demand be fueled by Argentina?
Weighing A Potential Move on the Vaca Muerta
Argentina-based YPF Sociedad Anonima ADR (YPF) is making no secret of the fact that it's looking for "strategic partners" to help it fund ambitious investment plans that include major exploration and production from the Vaca Muerta shale. While it has a partner in Petroleo Brasileiro SA Petrobras ADR (PBR), it does not appear Petrobras is eager to funnel the billions of dollars YPF needs through Argentina's economy. YPF's need for a major partner comes after the Argentinian government nationalized Repsol SA's majority stake in YPF earlier this year, a move that now makes it much less likely that YPF will be able to onboard partners on terms favorable to it.
To make a partnership more palatable, YPF recently announced a new discovery separate but apparently concurrent with the Vaca Muerta that is showing "great productivity" from three initial wells, according to YPF CEO Miguel Galuccio. In separate remarks Galuccio indicated that YPF met with Chevron executives in Buenos Aires on August 24; I think that it is safe to assume the majority of the meeting was centered on YPF's desire for a partnership. But, YPF is also courting Exxon Mobil (XOM) and Apache (APA) as potential partners, which information is public thanks to a steady stream of media releases from an unnamed YPF official.
I don't believe that these releases are in any way accidental, since in order to overcome the bad feelings among producers engendered by Argentina's seizure of Repsol's stake in YPF, YPF needs to do some serious strategizing to excite potential partners. Setting Exxon Mobil against Chevron is one way to do this, but inviting Apache to the table is a move that I believe will catch even more of Chevron's attention. While I think the chances of Chevron setting up a major deal with YPF on its own are remote, Chevron could partner with other producers to reduce its exposure and claim its share of revenues from the Vaca Muerta.
Outlook: Litigation Casts a Long Shadow
Chevron is currently trading around $111, with a price to book of 1.7 and a forward price to earnings of 8.1. For comparison, Exxon Mobil is trading around $87, with a price to book of 2.5 and a forward price to earnings of 10.0. Apache is trading around $84, with a price to book of 1.1 and a forward price to earnings of 7.5. YPF is trading around $12 with a price to book of 0.8 and a forward price to earnings of 3.2, not far from where it cratered following the announcement of nationalization of the Repsol stake. Petrobras is currently trading around $21, with a price to book of 0.8 and a forward price to earnings of 7.0.
Chevron is continuing to build its cash balance, which now stands at $21.2 billion compared to $15.8 billion at the close of 2011. I think that fears over suits brought against it in Brazil and Ecuador, despite a Chevron show of bravado in casting these litigations as fraud, are contributing to Chevron's rapid accumulation of cash. When other majors hold these types of balances it is reasonable to expect a dividend increase, a major acquisition, a debt paydown, or a combination of all three; in Chevron's case, I think it's unlikely that its cash balance will be substantially drawn down until both of these super-suits are settled or dismissed, which could be a matter of years.
Chevron recently lost an appeal to overturn a previous Brazilian injunction banning it from operating in Brazil until a $20 billion suit over a relatively minor oil spill in the Frade field last November is resolved. Once in effect, the ban will prevent Chevron and its partner Transocean Ltd from operating within Brazil, not just the Frade where the accident occurred. For Chevron, which is currently only operating on the Frade within Brazilian jurisdiction, the loss is not an immediate threat. But, this will have a cascade effect on other operators that depend on Transocean, notably Petrobras, which leases seven rigs from Transocean.
The appeal process may go to higher courts, but so far the moves against Chevron do not bode well for its ultimate chances of escaping heavy fines and penalties. This is painfully similar to its ongoing Ecuador nightmare, in which Ecuadorean activists are pursuing Chevron for $18 billion in damages related to legacy production in courts across the globe. Together, these two suits could wipe out Chevron's healthy cash balance as well as a significant portion of its equity. This in turn would lower Chevron's outlook across the board. Chevron is a comfortable hold, but a risky buy in the current environment.