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This Potential Asset Sale Reflects Chevron's Pragmatic Approach to Renewables

By Jay Yao - Apr 22, 2016 at 2:10PM

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Here's how the potential sale of the company's Asian geothermal assets affects Chevron and illustrates the company's renewable-energy strategy.

Geothermal Plant. Source: Flickr.

According to Bloomberg, Chevron (NYSE: CVX) is considering selling its Asian geothermal assets for as much as $3 billion. Malakoff Corp., Ormat Technologies (NYSE: ORA), and the sovereign fund China Investment Corp. could be among the buyers of Chevron's geothermal assets. Given the sale's billion-dollar price tag, let's analyze how the potential sale affects Chevron's finances and the company's future renewable energy strategy. 

Chevron's history with geothermal
Geothermal energy is clean energy that produces almost no greenhouse gases. Producing geothermal energy is in some ways similar to drilling for oil and gas. Natural groundwater enters into the earth near a dormant volcano, and the water is heated near depths of up to 9,800 feet. Wells of several thousand feet are drilled to recover the heated water and steam, and the steam is used to produce power while the water is returned to the reservoir. 

Chevron began geothermal operations in the 1960s by pioneering the development of geothermal plants in the Geysers, Calif. The company developed several geothermal projects in the Philippines in the 1970s and developed the Salak and Darajat fields in Indonesia in the 1990s.

Top geothermal producers Source: Ormat Technologies 

Today, Chevron's geothermal operations in Indonesia have a combined operating capacity of 647 megawatts. Chevron also owns a 40% interest in the Philippine Geothermal Production Company, which operates geothermal facilities in the Laguna and Batangas provinces. Those fields have a combined generating capacity of another 692 megawatts. Chevron's Indonesian and Philippine operations are the main reason the company is the second largest geothermal owner and operator in the world. It's also those Indonesian and Philippine operations that are up for sale.

The effect of the divestment for Chevron
Although Chevron doesn't break down the revenue it gets from geothermal in its quarterly or annual reports, other geothermal companies have released their financial reports, and the extrapolated revenue isn't meaningful compared with that of Chevron's oil and gas or downstream operations.

Geothermal producer Ormat Technologies, for example, realized $376 million in revenue in 2015 from its electricity segment, which owned and operated 697 MW of geothermal plants. Ormat's electricity segment had an adjusted EBITDA margin of 60% for the year. Given that Chevron's share of its Philippine operations and Indonesian operations add up to 923.8 MW and assuming similar adjusted EBITDA margins and revenue per watt, Chevron's adjusted Asian geothermal revenue would be around $500 million a year and the segment's adjusted EBITDA would be around $300 million a year. That compares with Chevron's 2015 revenue of $129 billion and EBITDA of $19.6 billion. 

The divestment would help bridge Chevron's cash flow gap, however. Because of weak crude prices and needed investment to finish its Gorgon and Wheatstone projects, analysts expect Chevron to have negative-$15 billion in free cash flow this year. Chevron will also have to pay approximately $8 billion more in dividends. Selling its non-core geothermal assets for potentially $3 billion would help Chevron preserve its balance sheet and plug its cash flow gap. 

Pragmatic approach to renewable energy
Chevron's potential sale of its Asian geothermal operations illustrates the company's pragmatic approach to renewable energy. 

Chevron realizes that having a renewable energy strategy is necessary. Demand growth for crude is expected to wane in the coming decade as clean transportation alternatives such as electric cars powered by renewable energy sources become more economically competitive. The company has invested into solar, wind, and biofuel technology as a result. Chevron has also in some ways moved beyond crude by producing more natural gas and LNG as a percentage of total production.

At the moment, however, Chevron is in a tough situation in terms of free cash flow given the low crude prices and the needed investment finish the Gorgon and Wheatstone projects before they become productive. Given that Chevron's geothermal operations haven't grown much since the 1990s, and the company could fetch a potential valuation of 10 times adjusted EBITDA (which is roughly in line with Ormat Technologies' valuation) for the assets, management concluded that there wasn't much more upside to the geothermal assets in Asia, and the capital garnered could be better used elsewhere.

Although it put the bulk of its geothermal assets for sale, Chevron could still play a leading role in the geothermal energy sector. By being one of the leading operators in geothermal for so long, Chevron has the skills to build more plants in the future in other locations. Analysts estimate that the potential for geothermal energy is over 10 times the current global installed capacity of 13 GW, meaning that geothermal has substantial growth prospects.  

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