Over the past few years, Chevron Corporation's (NYSE:CVX) production base has been slowly eroding away. In 2011, Chevron pumped out 2.673 million barrels of oil equivalent a day, or boe/d, on average. By 2012, that had fallen to 2.61 million boe/d, and last year, it fell even further to 2.597 million boe/d.
Upstream production is where most of the money is in the hydrocarbon industry, which is why it can be hard to reward investors without output growth. Since the beginning of 2012, Chevron has underperformed the Dow Jones Industrial Average. While its dividend has helped close the gap, upstream growth is the only thing that will truly boost shareholder value.
From 2012 to the first two months of its latest second quarter, Chevron's North American production has been flat at 655,000 boe/d, while international production slipped from 1.955 million boe/d to 1.901 million boe/d. Chevron may be at the tipping point, where future growth in North America will be large enough to offset output declines from mature fields, which would be a huge boon to shareholders. The Gulf of Mexico has several major projects about to come online, which could get the growth engine roaring.
Gulf of Mexico
Chevron extracted 216,000 boe/d last year from the Gulf of Mexico, and with numerous fields expected to start producing this year and next, that number will surely grow. Chevron has a 50% stake in the Jack Field and a 51% interest in the St. Malo Field, which is being jointly developed by a floating production unit that it owns 40.6% of. Production is expected to start up late this year, with a peak capacity of 170,000 barrels of crude and 42 million cubic feet of natural gas a day, equivalent to 177,000 boe/d.
Also in 2014, the Tubular Bells Field, operated by Hess Corporation (NYSE:HES), is expected to start producing, with Chevron owning 42.9% of the project while Hess holds the rest. Total production from the Tubular Bells Field is expected to reach 44,000 boe/d as it targets the Mississippi Canyon area.
Another project Hess operates that Chevron has an interest in is the Stampede offshore development, which targets the Knotty Head and Pony fields. Both Hess and Chevron own a 20% stake in the project, which should come online sometime down the road. A final investment decision will be made at the end of this year, and if Hess, Chevron, and the other parties involved decide it's worth the large upfront cost, investors can add the Stampede project to Hess' and Chevron's long-term growth portfolio.
It takes a long time for offshore operations to start producing, and even longer to reach full capacity. Luckily for shareholders, the Gulf of Mexico has several major projects about to come online that will kick-start Chevron's upstream operations. Not that far away in Texas, the Permian Basin also offers a shot of production growth investors can bank on.
This year, Chevron is guiding for output from its Permian Basin operations to come in around 150,000 boe/d. By 2020, that will grow to 250,000 boe/d as its rig count doubles. Output from its base will steadily decline over that time frame, which will be compensated by strong production growth from its Delaware and Midland Basin drilling programs.
In the Delaware Basin, Chevron plans on teaming up with several regional partners to de-risk plays as a part of its appraisal program, while shifting toward a more developmental and production based focus. This will reduce the amount of risk and cost Chevron will have to shoulder, as it can share that with its partners, while also allowing it to boost output without sacrificing growth in the future as new drilling locations are added to its inventory.
The past few years has seen output from oil majors trend downwards, but Chevron hopes it will be able to reverse the trend this year. By banking on the Gulf bonanza, Chevron will be able to generate large levels of North American production growth, mitigating declines from its mature assets. Combined with solid Permian Basin operations, Chevron may finally be able to grow once more.