Why Chevron Is a Must Buy

Despite a continued weak refining margin and lower crude oil and gas prices, the integrated energy company, Chevron (CVX), held its ground strongly in the stock market and rose about 12% since year-to-date. Even more surprisingly, this momentum in its share price continued regardless of the weak first-quarter results. Chevron reported a loss of $0.39 per share for the first-quarter of 2016, as compared to earnings of $1.37 per share in the same quarter in 2015.
Meanwhile, its revenue for the quarter came in at $23 billion, a drop of 28%, compared to the revenue of $32 billion last year.

This massive decrease in its top, as well as bottom lines was due to lower crude oil and natural gas realizations. For instance, its average sales price per barrel of crude oil was $26 in the first-quarter 2016, down from $43 a year ago. Also, the average sales price of natural gas liquids was $1.32 per thousand cubic feet for the quarter, compared with $2.27 per thousand cubic feet in the first-quarter last year.

However, despite this significant drop in the average realized crude oil and natural gas prices, Chevron managed to beat analysts’ estimate on revenue by a large margin of $2.13 billion. This growth in revenue was due to the new projects that the company brought online. Let us have a look at these new projects that should boost its revenue going forward.

New projects to become a tailwind

Chevron has either completed or is on the verge of completing major capital projects. The important thing is that these new projects are coming from all the segments. For instance, Chevron announced the first LNG production and the first cargo shipment from Train 1 at the Gorgon project in Australia in March. Likewise, earlier in the year, Chevron started production at the Chuandongbei project in China, while continuing to ramp up production in the Permian and Marcellus in the U.S., Lianzi, and Moho Nord in West Africa.

Meanwhile, the company expects production from its most awaited Angola LNG plant, along with a cargo shipment in May. In fact, the company remains high to start Train two and three at its Chuandongbei project in the ongoing quarter. Thus, the start-up of these major projects is a welcome sign for the company for a couple of reasons. First, the completion of major projects will reduce its long-cycle spend while boosting its cash flow and second, it will accelerate its revenue going forward due to its focus on higher return, shorter-cycle projects.

With the completion of these new projects, its capital expenditure is trending downward. For instance, its capital and exploration in a span of just three months decreased by $1.6 billion to $25 billion for the year, as compared to the $26.6 billion the company announced at the end of December 2015. As a result of this reduction in capital expenditure, its capital spending for the first quarter dropped 27% to $5.6 billion on a year-over-year basis. In fact, the company now plans to spend 32% less capital in the next couple of years.

Thus, these reductions in capital expenditure indicate that Chevron’s development projects are nearing completion. On the other side, Chevron should see higher production in the next year or two, which will lower its cost structure, due to attractive cash margins on the new production. So, moves such as these should boost its revenue in the future and create value for its shareholders going forward.

Lowering its costs structure

Chevron continues to reduce its cost structure, with improvement in the pricing, workflow efficiencies, and streamlining the organizational size to expected future activity levels. For instance, its exploration expenses for the quarter dropped by a whopping 38% to $370 million as compared to $592 million in the same quarter a year earlier. As a result of this decline in the exploration costs, its total expenses for the quarter fell 20% to $25 billion, compared with $31 billion in the first quarter of 2015, as shown below in the table.

Moreover, Chevron expects a significant reduction in the total costs in 2016 and 2017, due to the end of some transitional costs such as severance and rig termination fees. It remains high to carry on with the implementation of its various cost savings initiatives that should drive its bottom line performance in the future.

Supply shortage for LNG to drive its growth

Demand for liquefied natural gas is growing significantly. According to Cheniere, the demand for LNG in the newer markets such as India, the Middle East, China, and other Asian regions will grow at a CAGR of 4% from 180 million tonnes per annum to over 300 million tonnes per annum through 2030. Thus, Chevron should be in a better position to supply this growth with its LNG projects in China and Australia.

According to the management, this significant growth in the LNG demand in the Pacific Basin will create a supply shortage in the future, which should strengthen LNG prices and drive implied margins.


Therefore, Chevron, in my opinion is doing right things by focusing on completion of its major LNG projects by 2020. This completion of major projects will enable the company to create margins for its LNG efficiently during the shortage supply period. At the same time, the company is lowering its cost structure that should additionally support its bottom line performance going forward. Thus, all-in-all, Chevron looks like a good bet at the current price.
Published on May 16, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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