New technology has increased oil production from North American shale rock formations. Even so, oil prices have held up due to the improving global economy and lower output from conventional wells.
Still, the outlook for oil remains uncertain. The lifting of economic sanctions against Iran could increase world oil supplies, lower prices and offset recent strength in the oil market.
In response to this uncertainty, two oil and gas producers we cover in Wall Street Stock Forecaster are selling assets and spending less on new projects.
CHEVRON CORP. (New York symbol CVX; www.chevron.com) is the second-largest integrated oil company in the U.S., after ExxonMobil.
The company plans to spend $39.8 billion on exploration and upgrading its operations in 2014. That’s down 5.2% from the $42 billion it probably spent in 2013. Chevron will devote 90% of its 2014 capital budget to extracting oil and gas. The remaining 10% will go toward improving its refineries and gas stations.
Among Chevron’s bigger projects is its 47.3%-owned Gorgon natural gas development off Australia’s west coast. Gorgon, which includes a plant that liquefies gas for export, is 75% complete and should start up in 2015. Its reserves will last 40 years.
Chevron now expects Gorgon to cost $54 billion, up from its earlier estimate of $52 billion. The company’s share of the new estimate is $25.5 billion.
Chevron is applying its experience from Gorgon to its 64.14%-owned Wheatstone project, which includes a liquefied natural gas (LNG) facility on Australia’s west coast. Wheatstone is 25% complete and should start up in 2016. Chevron’s share of the $29-billion cost is $18.6 billion.
The company’s $4.00 dividend yields 3.2%.
Energy stocks: Onshore properties cheaper, less risky than offshore drilling for Apache
APACHE CORP. (New York symbol APA; www.apachecorp.com) continues to sell some its less important oil and gas properties, including its offshore fields in the Gulf of Mexico and a third of its Egyptian operations. In all, the company expects to raise $4 billion from these sales in 2013.
Apache will use half of the proceeds to pay down its $10.9 billion of long-term debt (as of September 30, 2013), which is equal to 32% of its market cap.
The company is also using the cash to increase production from its North American onshore properties. This approach is much cheaper than offshore drilling and has less political risk. Apache now gets 56% of its production from its onshore fields, up from 32% in 2009.
In addition, Apache is shifting its focus to oil and natural gas liquids (NGLs), such as butane and propane, which trade at higher prices than natural gas. In the third quarter of 2013, it produced 784,331 barrels a day (54% oil and NGLs, 46% gas), up 1.8% from 770,783 barrels a year earlier.
The company’s $0.80 dividend yields a low 0.9%.
In the latest edition of Wall Street Stock Forecaster, we look at whether the cost cuts these two stocks are undertaking will significantly lower their risk and keep cash flow rising. We also examine the cash flow forecasts for these two companies through 2014. We conclude with our clear buy-hold-sell advice on these two stocks.
If you’re a member of Pat’s Inner Circle and you’d like to ask a question about today’s article, please go to the question page reserved for you (be sure you’re logged in first). Click here to ask your question.
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The outlook for oil and gas production changes regularly, as would be the case if Iran’s large oil reserves come back on the market. Do you take the long view when you invest in energy stocks, or do you trade in and out of them as supply and demand affects prices? What has been the most successful investment you have made in an energy stock?
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