It seems as though the oil & gas market and Chevron (NYSE:CVX) are in the middle of an epic game of chicken. On the one hand you have a company that has said come hell or high water, it will maintain its dividend payment to shareholders. On the other you have a unrelenting oil & gas market that seems bent on testing the pain point of every company that touches the two commodities.
Chevron has thus far been able to surprise Wall Street by turning in surprising earnings results, but with oil spending a decent portion of the fourth quarter below $40 a barrel and no recent signs that it will improve, does Chevron have enough arrows in the quiver to fight off this price decline and keep its dividend payments in tact? The one place we can look is in the company's upcoming quarterly earnings release on January 29th, here is what investors should look for.
Winding down spending levels
With spending and production plans taking years to come to fruition, there aren't a whole lot of surprises when it comes to capital spending and production growth on a quarter to quarter basis. Most of the expectations for those things are baked in already. That's why for seems like the past couple of years Chevron's management has talked about how capital spending in 2016 and beyond will be much lower than what they were in the past.
Part of that has to do with not spending on new projects and current ones coming online, but one thing that has been happening as of late is large cost savings from services contracts. As some of these contracts roll over and are renegotiated, there should be opportunities for significant capital cost cuts.
At the end of the third quarter, Chevron was projecting it would spend $10 billion in the fourth quarter on its current capital program. However, it may be worth watching to see of the company was able to realize some lower capital costs in the quarter than originally projected. That would bode well for profitability in the quarter, but more importantly it means that Chevron may be able to meet other production goals while remaining in the lower end of its capital spending guidance for 2016-2018.
Major start-up plans for 2016
2016 will be a pivotal year for Chevron as its two largest projects to date -- Gorgon and Wheatstone LNG -- are slated to go live this year. Gorgon hit another snag as it was supposed to come online at the end of 2015, but Wheatstone appears to be on schedule and should have start-up by the end of the year.
Just getting these two projects up and running will be a major positive for the company, but the added news that it had secured long term production contracts for 80% of the two facilities capacity was a good sign that these two projects should be rather profitable once up and running.
On top of Gorgon and Wheatstone, Chevron has a few other projects that are slated to come online in 2016, notably in deepwater regions. So investors should keep an eye on when Chevron will be able to ring these online and turn cash burning projects into revenue generators.
Any more cuts to be made?
In the first 9 months of 2015, Chevron's management was able to enact some pretty deep cost cutting. It had let go between 6,000-7,000 employees and was expecting to realize some more and more from lower service contract costs. These have translated to a 13% decline in operational expenses on a year over year basis.
If oil prices remain as low as they are, then Chevron will need to find even greater cost savings somewhere if it has any hope of preserving its dividend. So on the management conference call, check to see if they mention anything about even further cost cuts that could help preserve profitability.
What a Fool Believes
Getting back to a point where Chevron is able to cover its dividend and capital expenditures with operational cash flow was a daunting challenge when oil was in the $50-$60 range. Unfortunately, the market keeps turning the screws to see of Chevron's management can still make good on its word to shareholders. If the company can show some signs that there is more places it can cut the spending and keep turning unproductive projects into revenue generating assets, then it will help get it there. The only question is when oil prices will start to cooperate.