It's been close to a decade, but one of Chevron's (CVX +1.29%) signature projects -- Gorgon LNG -- is up and running. Now Chevron doesn't have to worry about pouring tens of billions of dollars into this project, the company can really change its capital allocation decisions and adapt to the changing realities of the current oil and gas market.
Some of those decisions were on full display during the company's most recent conference call. Management continues to hint at where it will and won't spend its cash over the next several years. Here's a selection of quotes from the company's most recent conference call to give investors a better idea of the direction Chevron's management intends to go in the coming years.
Image source: Getty Images.
On track to meet long stated goal
For the last several years, Chevron's stated promise to investors was that it would be cash neutral in 2017 regardless of oil prices. In their mind, cash neutral meant that all of its capital spending and dividend obligations could be met with cash from operations. According to CFO Patricia Yarrington, Chevron is on track to meet that goal
We intend to be cash balanced in 2017 at $50 Brent prices, and this slide demonstrates that we are nicely on our way to delivering that. First quarter 2017 net cash generation of $900 million incorporates the impacts of growing operating cash flow, reduced capital spend and proceeds from asset sales. Operating cash flow reflects improved realizations and high-margin volume growth.
Image source: Chevron investor presentation.
Perhaps I'm nitpicking, but meeting that stated goal with $2.1 billion in asset sales -- 33% of all cash coming in the door -- doesn't seem like something that can continue in perpetuity. Perhaps the one thing that can give investors promise is that Chevron had a sizable working capital build in the quarter, which lowered cash from operations. If the company can finish bringing some assets online and wind down those capital builds, then it looks like it has a shot at meeting this goal without asset sales.
The powerhouse that is the Permian
Every oil & gas producer that has even the smallest amount of acreage in the Permian Basin is going to talk about it on their conference call, and Chevron is no different. Typically a company like Chevron is going to get its major production growth from megaprojects like LNG export facilities and offshore platforms. According to Steve Green, President of Chevron Asia Pacific Exploration and Production Company, the Permian is likely going to underpin much of Chevron's growth over the next several years.
[O]ur first quarter 2017 production [was] approximately 150,000 barrels of oil-equivalent per day, up about 35,000 barrels of oil-equivalent per day from the first quarter 2016. In March, we gave you our forecasted Permian compound annual growth rate of 20% to 35%, and we're currently well within that range. We're standing up our 12th rig, and our plan is to continue to add rigs at this pace, achieving 20 operated rigs by the end of 2018. In addition to our operated fleet, we'll see our share of production from 13 gross non-operated rigs.
We continue to see efficiency gains and improved well performance, and we're incorporating the learnings into our forward plans. We intend to realize value through accelerated development and deliberate portfolio actions from the 150,000 to 200,000 acres we have identified as candidates for swaps, leases or sales.
This isn't that surprising, really. Last quarter, management said it foresees shale comprising 25% of overall production by the middle of the next decade. While Chevron does have shale assets elsewhere, the Permian continues to be the center of its shale plan.
Wavering about and LNG expansion?
For more than a decade, the Gorgon and Wheatstone LNG facilities have been Chevron's defining investments. That hasn't always been a compliment, though, as Gorgon is synonymous with the largesse of megaprojects, cost overruns, and delays.
Now that all three trains at Gorgon are operational and Wheatstone's Train 1 should be up and running in the coming weeks, much of these issues will be forgotten over time. That is, of course, until the company starts to think about expanding the facilities as originally anticipated. When asked about the timeline to invest in expanding these facilities, Green gave a non-answer that could be rather revealing.
As far as expansion trains at Gorgon and Wheatstone, there are a lot of factors that go into that. Our first priority is to get these assets up, stable, working as intended and capture the value from the investment we've made. At that point then, it will be -- that decision, like any major capital project, will be a function of the market and the market's appetite for it and how those individual investments will compete in our portfolio at that time we FID them.
Typically these companies are quick to highlight that they want to make those expansions happen quickly, but it looks like Chevron is undecided about the future. Part of that could come down to negotiations with its partners -- ExxonMobil and Royal Dutch Shell are equity partners in Gorgon -- but it could also be that Chevron is a little gun shy about expanding its LNG presence. The company has also dragged its feet regarding a final investment decision for its Kitimat LNG facility in Western Canada.
Chevron got one thing right and one thing wrong when it gave Gorgon the green light. It properly understood the fast-growing demand for LNG, but it didn't foresee supply growing as fast as it has. Much of that has to do with the U.S.'s transformation from an LNG importer to one of the world's largest exporters in a decade's time. This changing market dynamic is going to drastically impact Chevron's investment decisions for LNG.
The priorities for any excess cash
Let's assume, for a minute, that Chevron is able to meet its stated goal of being cash neutral at $50 a barrel. What happens when oil prices go above $50? Yarrington was asked this specific question during the call and how her finance team at Chevron views its priorities for excess cash. Here's what she had to say.
The first priority is going to be given to growing the dividend when we feel cash flow and earnings can support it for the long term. And by that, I mean in perpetuity. Secondly, we look at future additional investment opportunities that we've got because we do need to continue to grow future revenue streams. And then we look at the balance sheet. It is important for us to continue to have a strong balance sheet. And what you saw in this quarter is really a flex in our commercial paper program, and that's part of why we have a commercial paper program is to take flex like this. So all of those are important to us. We do balance that. We're at 24% debt ratio, which is an OK place to be, I would say. But over time, I'd like to see us move a little bit lower in the debt profile when cash flow permits us to do that.
Yarrington also emphasized that maintaining an AA credit rating was a key target for the finance team, so you have to imagine that debt reduction and strengthening the balance sheet are going to get some attention in the coming quarters if it can generate excess cash. The only other question investors need to think about is what happens when oil prices don't stay above that $50 a barrel threshold.
