There are hundreds of companies in the oil and gas industry, but there are only a handful that most people can name off the top of their head. Chevron is likely to be one of them, as the U.S.'s second largest energy company; with thousands of retail stations across the U.S. and the world, it's pretty hard to miss that logo. Visible companies in this space like Chevron can be the first experience investors have with the energy space, and that's a good thing because the prospects for Chevron are quite bright.
Keep in mind, I'm not predicting that Chevron's stock will go up by X% in the next couple of months. Investing in Chevron is reserved for the real long-term investor who will hold this stock for years or potentially decades and reap the rewards of strong earnings power and dividends. Based on this, here are three reasons why you should be optimistic about the prospects for Chevron.
1) Strong production growth expected over next several years and beyond
One general rule of thumb when it comes to integrated oil and gas companies is that a majority of their earnings come from the actual production of oil and gas -- called the upstream side -- Chevron is no exception. Over the past five years, more than 90% of Chevron's earnings have come from this side of the business. What this means is that anyone who is considering Chevron for an investment needs to know its prospects for both maintaining and growing its production.
The first major positive sign here is that Chevron has a very strong base of production to work from. According to the company, the natural decline rate of its current operations is at 14%. But, with about $10 billion in annual capital investments for maintaining its base production, Chevron estimates that it can maintain a production decline rate of only 3% on these assets. Based on the company's current production, base production investments will have a rate of return of greater than 50%, which is very impressive for a capital-intensive industry such as oil and gas production.
Also, that slow decline in current operations means that the new projects coming online will boost production by almost 25% within the next two or three years.
Source: Chevron investor presentation
Looking even further down the road, Chevron has one ace up its sleeve: a massive holding of acreage in the Permian Basin that it is developing slowly. Today, Chevron has 17,000 prospective well sites in the Permian Basin and over 5,500 well sites in various shale gas formations in the U.S., which hold billions of barrels of potential resources for the company. Unlike independent oil and gas players that have been developing shale in the U.S. at a breakneck pace, though, Chevron's lease holding costs are very low. This means that Chevron can wait to develop these positions when market conditions are more favorable than they are today.
These shale positions are just one example of the several positions that have allowed Chevron to grow its unrisked resource potential to more than 67 billion barrels over the past five years.
Source: Chevron investor presentation
With a stable, growing base of resources, Chevron should be able to grow its production well beyond the 3 million barrels of oil equivalent per day it hopes to have online within the next couple of years.
2) Well positioned to serve demand from Asia-Pacific region
By just about every economic study out there, the Asia-Pacific region will lead the way in terms of energy demand for the next several decades. According to the U.S. Energy Information Administration, total energy demand from Asia is expected to more than double between now and 2040.
Source: US Energy Information Administration
Of the integrated oil and gas companies, this actually plays into the hands of Chevron more so than any other. One reason is that more than 75% of Chevron's petrochemical refining capacity is positioned to serve the Asia-Pacific region.
Source: Chevron investor presentation
This is valuable to Chevron in more ways than one. First, by having so many of its assets already located in the Asia-Pacific region, it will be able to capture value from this trend without massive capital expenditures like other integrated oil and gas companies that may be focused more in either the U.S. Gulf Coast or Europe. At the same time, Chevron's refining and chemical segment has been declining recently.
Source: Chevron Investor Presentation
Increased demand for petrochemical premium base oil products, such as lubricants, will likely increase prices within the Pacific Rim, and Chevron's ability to source cheap North American oil and gas to its facilities could mean that returns on these facilities will increase over the next several years.
3) Chevron doesn't have to deal with this guy
Source: Kremlin.ru via commons.wikimedia.org
If you look at Chevron's quiver of new projects it plans to pursue over the next several years, there is one part of the world that is missing: Russia. Chevron currently is the only one of its peers that doesn't have any current operations in Russia or any joint venture deals in place for future projects.
This could be both a blessing and a curse for Chevron. In one sense, Russia has some of the largest untapped oil and gas resources on the planet and many of them could be accessible without high development costs. So Chevron could end up paying more for future growth than some of its peers. On the other hand, the company won't have to deal with the political tension that has riddled both Russia and the West recently. In the event that things were to escalate between Russia and the U.S. or Europe regarding the situation in Ukraine, many companies could find themselves with billions of barrels of potential resources missing from their development plans, while Chevron may remain rather unharmed.
What a Fool believes
The overall outlook for oil and gas looks rather promising for the next several decades, especially in the fast growing economies of Asia. Chevron is in a very good position to take advantage of that, and potentially with less risk than its competitors. Keep in mind, though, these are very long-term trends that will take many years before Chevron reaps all the potential benefits. So sure, there are lots of reasons to believe that Chevron's stock will rise, but you better be a patient investor to truly benefit from it.
