Chevron Corporation’s Future Projects Offer Value

Chevron offers investors improving cash flows and increasing dividend

Jan-e- Alam
Jan-e- Alam
Apr 19, 2014 at 9:59AM
Energy, Materials, and Utilities

Chevron Corporation (NYSE:CVX) has witnessed notable variability in its production trends over the last few years. Production volumes increased approximately 5% a year from 2008 to 2010 and then declined approximately 2% per annum through 2013. The decline in production is mainly due to the nature of the company's portfolio. The company's deepwater projects resulted in strong initial production and cash flows but also had higher declines than other long-lived LNG and oil sands projects. The company had 26 major oil and gas projects under construction last year, however very little of this production has translated to revenues yet.

The company is targeting volume growth of 20% by 2017, mainly driven by the big Australian liquefied natural gas (LNG) projects such as Gorgon and Wheatstone and the deepwater developments in the U.S. Gulf of Mexico .

Production delayed not lost
The continued delays in the project start-ups or the inability of projects to reach design capacity are weighing on the company's stock. Chevron's stock reached an all-time high of $128 last year; however, since then the news of delays in the ramp-up at Angola, continued cost overruns at Gorgon, and disappointing 2014 guidance have pulled back the stock.

Chevron recently lowered its 2017 production volumes guidance by approximately 5%. Currently the company produces 2.6 million barrels a day and expects to increase it to 3.1 million barrels a day (with previously issued guidance of 3.3 million barrels a day). The decrease in the production volumes guidance is largely attributable to an expected drop in demand of oil due to higher expected oil prices, an expected decrease in LNG prices, asset sales, and the cushion due to uncertainty over large, complex projects.

Despite delays in production, I remain optimistic on Chevron's prospects. It is important to note here that the start-up and ramp-up delays have only postponed production -- oil and gas will eventually be produced. Moreover, Chevron is not the only company affected by start-up and ramp-up delays at Angola. Although Chevron is the largest stakeholder in the Angola LNG project with a 36.4% stake, other companies also have stake in it. Total SA (NYSE:TOT), BP plc (NYSE:BP), and Eni SpA (UNKNOWN:ENI.DL) each hold 13.6% stake, while the remaining 22.8% is held by state-owned Sonangol .

Australian projects should service Asian demand
Chevron's new liquefied natural gas projects in Australia are expected to come online in the next couple of years. While the delays and cost overruns have pushed the Gorgon project start-up to 2015 instead of this year, the Wheatstone project is not expected to face such issues. Given the location of the facility compared to the more challenging site at Gorgon, the Massive Wheatstone project should be able to meet its target start-up in 2016. Once these two projects come online, they are well positioned to cater to the rising energy demand from emerging markets in Asia.

Open to further downstream restructuring but believes in integrated model
Chevron has completed much of its downstream restructuring, but given the high multiple being paid for midstream assets, the company remains open to selling more of these assets. Chevron's downstream unit only contributes 15% of the total company's cash flows; however, the company remains committed to its integrated business model. Chevron, the world's third largest energy company by market value, is ramping up its 25,000-bpd premium base oil plant at the Pascagoula Mississippi refinery this year and has sanctioned a new integrated chemicals facility on the U.S. Gulf Coast for start-up in 2017.

Bottom line
Chevron has had execution issues lately and has faced a number of start-up and ramp-up delays. However, the company is still well positioned to grow production among majors. The company's projects currently under construction offer significant value. The capital spending is expected to come down significantly once the company's Wheatstone project comes online. Chevron is a core holding among the oil majors. It offers investors industry-leading profitability, improving free cash flows, and an increasing dividend. It has a strong balance sheet and is trading at a discount relative to its peers.