How Chevron Is Surviving the Weakness
Chevron (CVX) has been aggressively looking to sell-off its non-core assets in order to overcome the weakness in the oil market. In fact, it aims to sell non-core assets worth $5 billion to $10 billion over the next couple of years. The good part is that Chevron is already making progress on this front.
For instance, after signing an agreement to sell its New Zealand downstream operations in the first quarter, Chevron continued the momentum with significant transactions in the second quarter.
Thus, in my view, the company is doing the right thing by investing in the assets that remain profitable and divesting the assets that have lower returns in the current oil price environment. This move will allow the company to improve its free cash flow going forward, even if oil prices remain constant at $52/barrel in 2017.
The weakness could continue
Looking ahead, EIA estimates the non-OPEC production to decline by over 0.6 million barrels a day in 2016 and by 0.2 million barrels a day in 2017. This reduction in the non-OPEC production is driven by a high production decline rate in U.S. tight oil production that remains the most price-sensitive oil production across the world. EIA expects the U.S. production of liquid fuels to drop by over 0.5 million barrels a day in 2016 and approximately 0.1 million barrels a day in 2017, due to a significant decline in onshore crude oil production. Outside the United States, forecast non-OPEC production declines by 0.1 million b/d in both 2016 and 2017.
Thus, this reduced production level across non-OPEC will keep the crude oil inventories at the low level for the next couple of years, supporting the crude oil prices. This should be a positive sign for Chevron that continues to focus on high return assets for its upstream business while lowering their costs. Let us have a look.
Thus, in my opinion, the investors should continue holding their positions in Chevron. The company has streamlined its upstream business that should deliver improved financial performance with the recovery in the crude oil prices. At the same time, the company is lowering its costs structure as discussed above that should enable Chevron to improve its bottom line performance going forward.