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Look Beyond Chevron's Struggles to see its Strong Long-Term Potential

By Bob Ciura – Feb 12, 2014 at 8:48AM

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Despite Chevron's falling profits last year, its projects coming on line over the next few years will fuel production growth for many years.

By now, it's no secret that Big Oil had a very difficult time in 2013. Last year was marred for a slew of energy super-majors, including Chevron (CVX -0.80%), ExxonMobil (XOM -0.85%), and Royal Dutch Shell (RDS.B). This was due to a combination of factors including stagnant upstream oil and gas production, difficult downstream conditions that resulted in shrinking refining margins, and supply disruptions in risky international geographies.

For Chevron, while last year proved to be difficult, management is extremely confident in the company's future. That's because Chevron feels its long-term production, driven by a few key high-profile start-ups, will be extremely strong. Read on to discover why Chevron is so optimistic, and why that sense of optimism is well-deserved.

Chevron's year in review
Chevron's struggles in 2013 echoed those of the integrated super-majors. Poor downstream conditions, brought on by lower margins on refined products, caused downstream earnings to collapse by 57%. As a result, net earnings dropped by 18% year over year. This seems like a terrible result on the surface, but there is a notable caveat that separates Chevron's performance last year from its closest rivals.

Chevron's downstream results held up much better than ExxonMobil's. ExxonMobil's downstream segment posted a whopping 74% decline in earnings. Lower refining margins decreased its earnings by $2.9 billion, and the absence of a restructuring gain last year brought down earnings by another $5.3 billion. This caused ExxonMobil's total earnings to fall by 27%.

Chevron's upstream segment posted a 3.3% drop in production of oil equivalents last year. Chevron's production was boosted by project ramp-ups in the United States, but this was more than off-set by field declines. As a result, it seems that Chevron would be wise to invest heavily in upstream projects over the next few years.

Fortunately, that's exactly what Chevron has planned
Chevron expects to allocate nearly $40 billion next year to capital expenditures, a full 90% of which will be budgeted for upstream oil and gas exploration and production projects. Chevron's 2014 production profile will be supported by near-term investment in highly profitable regions such as the deep-water Gulf of Mexico and the onshore Permian Basin.

And, in future years, Chevron has some big things planned to fuel its production over the long term. One such project is the huge ongoing Gorgon liquefied natural gas project in Australia. The Gorgon project will be one of the world's largest natural-gas projects and the largest single resource development in Australia's history. It's been under construction for four years and the estimated cost stands at $54 billion.

Chevron will soon be able to reap the rewards of its massive investment, as the project is now 75% complete. Management expects first gas delivery for the middle of 2015. Chevron expects to generate 400,000 barrels a day of net production at full capacity from its total LNG developments. This would mean considerable production growth of approximately 15%, as Chevron produced a total of 2.6 million barrels of oil and gas per day last year.

Close competitor Royal Dutch Shell would be wise to adopt Chevron's strategy. As opposed to ExxonMobil's performance last year, Royal Dutch Shell navigated the poor downstream environment fairly well. Its problems were brought on primarily from poor upstream performance, driven by weak production volumes, increased exploration expenses, and an ongoing security situation in Nigeria that is disrupting supply and proving to be increasingly harmful.

Production dip last year belies Chevron's strong future
Chevron, like most other global integrated majors, struggled to keep production afloat this year. In addition, overall profits were significantly weighed down due to horrible refining conditions. However, those items mask Chevron's future production potential, due largely to its massive Gorgon project which will boost long-term production growth for many years.

Warren Buffett is a fan of ExxonMobil, but what else can we learn?

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Chevron. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Exxon Mobil Stock Quote
Exxon Mobil
$109.86 (-0.85%) $0.94
Chevron Stock Quote
$181.03 (-0.80%) $-1.46
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc

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