Integrated energy major Chevron (NYSE:CVX) is rumored to be considering selling or spinning off its midstream business in the United States, according to Bloomberg. Midstream activities, which include the gathering, treating, and transporting of oil and natural gas, is a relatively small piece of Chevron's pie. In addition, due to poor results last year, companies across the integrated space are increasingly turning to asset sales to weather the storms.
Two of Chevron's biggest integrated competitors, Royal Dutch Shell (NYSE:RDS-B) and BP (NYSE:BP), are telling investors to expect sizable asset divestments in the upcoming years as well. This is clearly an industrywide trend, so it's not as if Chevron would sell these assets out of desperation. Plus, Chevron has already sold some midstream assets in the United States. That's why a further midstream sales makes sense considering Chevron's bigger strategic priorities.
Asset sales gaining traction
Several members of Big Oil are pursuing aggressive asset sales to raise cash in light of the tepid operating environment. Multiple corners of the integrated business model are suffering right now, with downstream struggling the most. That's due to a severe drop in margins on refined product sales. Upstream hasn't been a saving grace, either, as field declines are offsetting solid production rates. These were the primary reasons for why Chevron's profit fell 18% last year. Downstream was hit particularly hard, where earnings fell by almost half.
As a result, it's not at all surprising to see integrated majors such as Chevron, Royal Dutch Shell, and BP unload considerable assets. Shell has focused its recent divestments on the downstream side of the business. Over the past several weeks, Shell sold downstream assets in Italy and Australia for more than $2.6 billion. These moves are part of the company's broader desire to divest $15 billion worth of assets by 2015.
BP is also readying itself to be slimmer going forward. That's because it divested $17 billion in assets last year, and has even more in store. BP has another $10 billion of divestments planned by the end of next year.
Midstream sale makes sense
Chevron could fetch a fairly strong selling price for its midstream assets, according to industry observers. An analyst at Oppenheimer pegged the likely value of the U.S. midstream business at between $3 billion-$5 billion. While that's a relative pittance to a company of Chevron's size, it nevertheless represents a source of funds that could be used to supplement its core exploration and discovery operations, which are more important to Chevron's future.
The vast majority of Chevron's profits come from upstream. In fact, a full 97% of the company's 2013 earnings were derived from upstream, which includes exploration and production activities. These are the most important businesses for Chevron, and as a result, it makes a lot of sense to unload other assets that aren't very important to the company.
Moreover, Chevron has a history of shedding domestic midstream assets it deems non-critical to its future, so another sale would simply be a continuation of that strategy. Last year, Chevron sold $355 million worth of pipelines and terminals to Tesoro Logistics LP (NYSE:ANDX). These assets are located in the Northwest.
In a sense, Chevron will be an upstream pure-play
Chevron is still an integrated major in the sense that it technically holds a midstream and downstream business. But that all stands to change, since the company is steadily selling off midstream assets and its downstream operations are shrinking in prominence. Upstream accounts for a huge percentage of Chevron's profits, a trend which is set to continue.
For example, the fact that 90% of its $40 billion capital budget this year will be devoted to upstream oil and gas exploration and production projects further symbolizes Chevron's desire to focus on upstream over the long term. That's why a further midstream sale makes strategic sense for Chevron.
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Bob Ciura owns shares of BP p.l.c. (ADR). The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. 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.