Chevron's (NYSE:CVX) management is focused on one long-term goal right now: closing the gap between its spending habit and its ability to generate cash flow within the next couple of years. The decline in oil prices over the past year hasn't helped much, but the company wants its investors to know that it has a lot of levers it can pull to get there. Here are several comments from the company's most recent conference call that reflect how the company plans on meeting those stated goals. 

1, There are some silver linings to market downturns
In every bad situation is always a little bit of good. In the case of the oil-price drop and the fast decline in rig counts and drilling activity in the United States. Chevron and other producers have been able to renegotiate several of their contracts with equipment suppliers and service contractors, which is leading to some pretty significant cost savings. Chevron CFO Patricia E. Yarrington gave a small highlight:

We're also aggressively pursuing savings through the supply chain, particularly in the U.S., where our supplier responsiveness has been high. We have negotiated in excess of $1 billion in immediate savings, achieving product category reductions of typically 15% to 30%.

It may not be enough to completely cover up the decline in revenue from oil prices, but $1 billion in savings is a good-sized chunk of change that will certainly help, especially if those cost savings can be locked in for the longer term.

2. We're getting much more efficient at shale drilling
Big-oil players such as Chevron were a little late to the game when it came to drilling shale formations in the United States, and it took some catching up to realize some of the cost savings and better well economics that its smaller competitors were getting in similar regions. While those reduced costs from new supplier contracts have certainly helped Chevron catch up, some of its gains in operations efficiency and a better understanding of extracting resources from shale have led to some surprisingly good results. Said James William Johnson, senior VP of upstream operations:

So in summary, cost reductions, improved efficiency and increased recoveries have improved our development cost per barrel by around 35% relative to 2014 and make more than 3,000 well prospects economic at $50 per barrel WTI.

That last number is the most encouraging one. At a breakeven price of $50 per barrel, that puts Chevron on the lower end of the cost curve for shale drilling. With a lot of potential wells at that breakeven price point, it could give Chevron a decent production platform in this lower price environment.

3. Getting Gorgon and Wheatstone online will give us a ton of options for capital spending
So much of Chevron's near-term growth is riding on the development of the Gorgon and Wheatstone LNG facilities in Australia. The capital commitments for the two facilities represent almost one-quarter of Chevron's current market capitalization. Also, since these are such large projects that are under heavy construction spending today, they're taking up a huge portion of the annual capital budget. Once both of those facilities are up and running in 2016, though, it will give the company a lot of flexibility to invest in other projects or cut total capital spending altogether. Here's Johnson describing what getting these two projects online means to the budget: 

Just for example, in our LNG projects, this year, we expect to spend around $8 billion in LNG, C&E, but by 2017, that's down to $1 billion. So we'll see tremendous flexibility coming in just from that. At the same time, we're looking at our base business. And as I mentioned, we are bringing our cost down, our efficiencies up. So we're seeing very good performance out of our base business and able to compete even in this environment. So we're evaluating how much money to put back into the base to maintain and continue to grow, particularly the short-cycle, high-value returns.

You can do a lot of different things with $7 billion. Simply cutting that much from the budget would be a more than 20% reduction in capital spending. However, as Johnson suggested, some of that capital spending could go into shorter-cycle development projects. Considering that the company mentioned it has a breakeven cost of $50 a barrel on shale wells and that those are some of the shortest-cycle development projects an oil company can invest in today, it would not be a shock to see Chevron expand its shale production post Gorgon and Wheatstone.

4. We're conserving cash where we can
Back in 2013, many of the big oil players were saying they expected capital spending to peak in either that year or in 2014, and it looks like it's actually happening. Going further into the future, though, it appears that Chevron is looking to make even deeper cuts, as Johnson explains:

We've reduced our current-year capital spending by $5 billion relative to 2014. In the current environment, we are planning to reduce our 2016 and 2017 capital programs, and our flexibility in capital spending significantly increases as our projects already in execution are completed. We are pacing projects not yet in execution to ensure we capture the cost advantages presented by the current environment and are prioritizing them to manage our capital program.

This is the dilemma oil companies face today. They can put several projects on the back burner now to conserve cash over the next couple of years, but in doing so they could make growth that much harder to come by further out. It appears that Chevron's priority is to get cash up in the near term, and there's a reason for that. 

5. We're going to cover our dividend payments in 2017, no matter what
One of the questions that arose was the ability to cover its dividend payments. During the company's analyst presentation, it said that it will fully cover capital expenditures and dividend payments with operational cash flow in 2017. However, at the time, that assumption was made with the price of Brent crude at $70 a barrel. 

Cvx Cash Flow

Source: Chevron investor presentation.

That's all well and good, but what happens if oil remains below that $70-per-barrel threshold? Here was what Yarrington had in response to that question.

We said we would cover the dividend from free cash flow in 2017. We stand by that commitment. We are taking the steps necessary to ensure we are a resilient competitor regardless of the ensuing price environment. Our focus areas are shown on the slide: Get our capital projects currently under construction online; rebase and reprioritize our capital outflows; maintain reliability and drive our cost structure lower; and conclude our planned divestment program. If the lower-priced environment persists for longer, we will see even more significant cost savings and even greater cuts in capital.

So there you have it. Chevron says it still plans on achieving that goal of meeting its capital commitments by 2017, regardless of what happens to oil and gas prices between now and then. The question still remains, though: How much of its longer-term future will it have to sacrifice to make that happen?

What a Fool believes
It's hard to overstate the importance the Gorgon and Wheatstone projects have on the future of Chevron. With so much capital tied up in these projects, successful completion of them will give the company a lot of financial flexibility in the future. Management has made it apparently clear that getting these projects done and cutting costs are the two priorities right now, because doing these two things will give it the best chance of meeting its stated goals for 2017.

 

Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com or on Twitter @TylerCroweFool.

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