On July 29, the Richmond city council gave its verdict on Chevron's (NYSE:CVX) $1 billion bid to upgrade its century-old refinery - North California's largest - following an eventful six-hour hearing with the oil behemoth scoring a partial triumph. Partial because the vote on CVX's proposal titled Alternative 11, which accompanies a revised Environmental Impact Report (EIR) to cater to the shortcomings of the initial proposal five years ago, had two abstentions despite the 5-0 verdict in the company's favor. Those two people happened to be Gayle McLaughlin and Jovanka Beckles, the mayor and vice mayor of Richmond respectively.
CVX's original proposal to revamp its refinery was rejected owing to environmentalists rallying against the pollution and the ensuing diseases that hadn't been addressed by the company. The city realized that it couldn't possibly have any control over the thousands of tons of pollutants that the refinery pumps into the year annually, and so when the opportunity had come in 2009, the community left no stone unturned in ensuring that CVX was prudent about the environmental ramifications of its refinery. And the demands didn't end there…
The agreement with CVX jumped from $30 million to $90 million worth of investment in community programs. The company's property taxes were prodigiously increased with federal regulations slammed on CVX as well. The oil giant has meanwhile agreed to all the demands thrown at it, to earn the much valuable goodwill of the people of Richmond. Alternative 11 is the culmination of all that effort.
The 2,900-acre Chevron Richmond Refinery processes around 240,000 barrels everyday of petroleum chemicals. The primary products are jet fuel, diesel fuel, motor gasoline and lubricants. The total value of Richmond for CVX amounts to around $9 billion in revenue if one factors in the annual barrels of oil that it produces. The company's annual profit from Richmond is around $2 billion.
Richmond's city council has approved an 'environmentally superior' version of CVX's project which restricts the processing of 750 tons of sulfur per day, in lieu of the 900 that the company had eyed. The council has however prohibited a hike in greenhouse gas emission, which in turn means that CVX would not be able to import oil by rail.
The Richmond refinery might be responsible for around $76.7 million worth of the city's economic output, employing 2,100 people and paying about the third of the city's annual budget in direct taxes, but CVX lacks the city's overwhelming goodwill. The August 2012 fire has had a part to play in that.
McLaughlin and Beckles abstaining from the vote showcases the fact that despite CVX splurging the cash in the last five years and incorporating the latest technology to cater to the safety and health needs, it still has more to do as it hankers after the community's unanimous support. In a recent interview Beckles suggested that CVX failing to invest in a community hospital was the reason why the mayor and vice mayor abstained from voting. And considering that it's only been a couple of years since the August 2012 fire and the fact that the community's principal concern is with regards to health concerns, one would have thought that investing in Doctors Media Center would've been a no-brainer. It would've gone a long way in garnering the city's support.
With McLaughlin and Beckles, leaders of RPA (known for their antagonism apropos CVX) bowing out this year, the oil giant would be backing Mike Parker in this year's election. Parker has regularly termed Richmond's attitude toward CVX as "anti-business" and has accused the Planning Commission and the mayor of making unreasonable demands.
CVX is expected to invest heavily in Parker's bid to become the next mayor of Richmond before work commences on the project early next year.
Lessons for Investors
CVX was downgraded from "overweight" to "equal weight" by Morgan Stanley on Monday. Even so, MS did raise the target price for the company to $140 from the previous $135.
Although CVX's profile of long-term growth and free cash flow is on track, it's the production that is being slashed left, right and centre, as vindicated by the company's Q2 report. Even though revenue was up 1% to $57.94 billion in the quarter, the production fell to 2.55 million barrels per day from last year's 2.58 million annually.
Production is predicted to remain flat till the end of this year, but it is widely expected that CVX would up the ante on growth projects, from early next year, with a lot expected from the company in 2016 and 2017.
Richmond, with an annual $2 billion profit (which is expected to rise following the city council's verdict and the ensuing project) is a very crucial piece in the CVX jigsaw puzzle, as it looks ahead to the next couple of years. The company cannot afford to dent the nearly quarter of a million barrels of oil that the refinery conjures everyday and would want to augment the numbers that it generates from North California's biggest refinery in the next couple of years. But for the company to fully capitalize on Richmond's potential, it would have to earn the trust of the community.
Those interested in CVX should keep an eye on the mayor election in Richmond. If Parker wins, CVX would significantly increase its production from Richmond, which in turn would provide an impetus to its projects elsewhere, making it a stock to look out for over the next couple of years.
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.