The greatest challenge about investing in integrated oil and gas companies like Chevron (NYSE:CVX) is to remain patient in an impatient world. As a company that produces approximately 3% of the global oil supply on a daily basis and that operates in such a capital intensive business, realizing the value of your investment can take several years as you let dividend reinvestment build wealth over the long term.
It can be a big leap of faith to make such a long term commitment to a company, and Chevron's management is well aware of the commitment that investor are making. So to help you gain a little bit more confidence in what Chevron is doing, here are five things that Chevron's management wants you to know.
We'll be around for a long time
If there was any concern that Chevron might run out of oil and gas anytime soon, this chart should put you at ease. While the company can only officially report proved reserves of 11.2 billion barrels of proved reserves, that number is more of a reflection of the US Securities and Exchange Commission's rules on reporting proved reserves than the physical amount that Chevron has available to it. With over 67 billion barrels of recoverable resources, Chevron could stop looking for oil altogether today and at current production levels could run for close to 70 years before it runs out of oil.
That long of a runway should give some investors comfort if they were worried about the long-term future of the company.
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When it comes to oil and gas exploration and production, companies don't have the luxury of pulling oil from the ground wherever they please. They need to go where the oil is. The rest of the company's business, though, such as refining, chemical manufacturing, and retail sales, can be located strategically to target demand in particular ways.
Chevron's refining and chemical manufacturing assets are better positioned to supply the Asia-Pacific market than the rest of its peers. This is extremely critical because this part of the world expects to see energy demand grow the greatest between now and 2040.
With most of its assets already in place, it will take a lot less capital for Chevron to ramp up supplies to this market than most of its peers. So investors that see the Asia-Pacific region as an immense investing opportunity should take a second look at Chevron.
We're going to grow, and these five projects are going to make it happen
"While many projects contribute to our growth, the majority of our new volume is generated by aid of our largest MCPs. Gorgon and Wheatstone in Australia; Mafumeira Sul and ALNG in Angola, Papa-Terra in Brazil and Jack/St. Malo, Tubular Bells and Bigfoot in the deepwater Gulf of Mexico." --George Kirkland, Vice Chairman and EVP, Upstream
It isn't exactly easy sometimes to track how an integrated oil and gas company is going to grow over the next several years -- mostly because production growth will come from more than a dozen or so projects that all add up to a decent growth rate. This time, though, Chevron is taking a slightly different approach. It has concentrated its success on a select set of projects, and gone all-in with each of them as a majority owner and operator of each. Chevron even has a 50% stake in the Gorgon LNG export facility in Australia; a project that is expected to cost upwards of $50 billion when it's all said and done.
If you're looking at investing in Chevron, it is extremely important that you understand this small group of projects and how they are progressing. The more that each one costs, the lower the overall returns will be for the company. This should help give you a rough gauge of the company's success over the next few years.
Our production growth? It's kind of a big deal
"We have the best growth profile among the peers between now and 2017. Every quarter as project milestones are checked off, we get one step closer to the inflexion point." --Pat Yarrington, VP and CFO
Of all the big names in oil and gas--ExxonMobil, Shell, BP, those guys--Chevron's business is the most concentrated on the exploration and production side of the business. Today, more than 90% of the company's earnings comes from this business segment. So it is much more important to Chevron's success to grow production than its peers.
So to meet that obligation and create value for its peers, Chevron has embarked on the most ambitious production growth plan in the business. Between 2012 and 2017, the company's five-year plan is to increase production by 20% to just over 3 million barrels of oil equivalent per day. This may not seem like much to investors that have seen independent oil and gas producers double production in a matter of months thanks to the boom in shale oil and gas, but keep in mind that Chevron needs to bring on over 500,000 barrels per day's worth of production to meet that goal.
If it can meet that goal, then the company will likely significantly boost its earnings and be able to return those earnings to shareholders in the form of an increasing dividend.
Yeah, we've spent a lot of money lately, but that's not going to last long
For a company the size of Chevron, one of the important measures of its success is how it is able to allocate capital to projects. The basic way that this can be measured is called the return on capital employed. This counts not just the assets that are currently producing, but also those which are under development.
In the case of Chevron, it has a lot of its employed capital that is dedicated to projects still under development. This has caused Chevron's return on capital employed numbers to dip over the past year or so.
Granted, most of the big oil players have been dealing with this. However, as several of these megaprojects come online, it will reduce that amount of pre-productive capital, which should in turn increase return on capital employed.
What a Fool believes
Chevron makes for a very interesting case in the big oil space. It may not look like the most attractive investment today based on its valuation compared to its peers and its declining returns, but if it can start to bring this set of projects online it should provide a nice boost to earnings and returns and make today's stock price look pretty good. With the demand for oil likely to last for many more years, Chevron will likely be there to fulfill that need, and help its investors build wealth along the way.
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