Chevron (CVX +0.05%) is one of the largest integrated energy companies on the planet. But even an integrated business model can't shield the company from the basic dynamics of the oil industry -- one of the biggest being that oil and natural gas are depleting assets. Here's what Chevron is doing about it.
Chevron missed out on one deal, but made up for it with others
Just before the pandemic hit in 2020, Chevron found itself in a high-stakes bidding match with Occidental Petroleum to acquire Anadarko Petroleum. In the end, with the help of Warren Buffett's Berkshire Hathaway, Oxy won the day.
Chevron decided it wasn't worth the risk of overpaying, which worked out well for it given the way oil prices plunged during the pandemic. Because of the debt Occidental had taken on, it was forced to cut its dividend. Meanwhile, Chevron kept increasing its payouts, thanks largely to its ability to lean on its balance sheet as it muddled through the industry's weak patch.
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The attempt to expand via acquisition wasn't a one-off effort on Chevron's part. More recently, it agreed to buy Hess for $53 billion. This is fairly normal activity for the energy sector these days, as ExxonMobil also agreed to a big acquisition recently. The purpose of these moves isn't just about the instant growth they afford. They also allow the buyers to offset the natural declines in production that occur with existing wells as they are gradually depleted. Such headline-grabbing events, however, are just the most notable activities on this front.
Other ways Chevron is dealing with depletion
So what else can Chevron do? For starters, it can find new places to drill for oil. Buying operating assets comes with greater certainty, of course. Just because Chevron drills a hole doesn't mean that oil or natural gas is going to come up as expected. However, if a company finds a good place to drill for oil, exploiting it can be very profitable. This is exactly what Chevron has been doing in Guyana. The problem with this approach, even when it works out well, is that it is costly to develop a new oil asset from the ground up, and the process can take many years. This is an important tactic in the effort to compensate for resource depletion, but there's still one more way for a company to ensure long-term success.
NYSE: CVX
Key Data Points
The last big lever at Chevron's disposal is to, basically, get better at producing oil and natural gas from its existing operations. That means using technology to improve well output, which is essentially the story that has taken place in the onshore U.S. oil and natural gas space. Not too long ago, fracking as it's practiced today didn't even exist. Until that technology arrived, companies knew there was oil in some regions of the United States, but it wasn't economically viable to extract it.
When fracking first took off, meanwhile, companies were drilling and learning at the same time. That wasn't particularly efficient. As companies have learned what works and what doesn't, wells have become more productive, and drilling costs have fallen -- which is why giants like Chevron have been building up their positions in the U.S. fracking market. Scale and technology give them the ability to produce oil more efficiently.
It takes all three
The thing about Chevron is that it's so large that it can't simply rely on one approach when it comes to battling the impacts of depletion. What sets it apart from smaller peers is its ability to act on all three of these fronts simultaneously to keep its production numbers up over time. And while the world is indeed transitioning toward much greater use of cleaner energy sources, that shift will require decades to complete. So Chevron has to keep working the levers it has to help satisfy the world's need for oil and natural gas, two fuels that are still the backbone of the global economy.
While Chevron's stock price can get particularly attractive during industry downturns, today's 4% dividend yield is still worth examining for conservative investors interested in owning a piece of a well-run oil company.
