As crude oil continues to trade in a relatively narrow range, large, integrated producers offer investors a more secure way to gain exposure to oil.
This U.S. giant began several big offshore gas projects off the Australian coast that helped boost production in 2017. It is spending $5.5 billion on new growth projects this year. The company’s balance sheet is strong and it recently raised its dividend for the 31st consecutive year.
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CHEVRON CORP. (New York symbol CVX; www.chevron.com) is the second-largest integrated oil company in the U.S. by revenue, after ExxonMobil (New York symbol XOM).
Producing oil and natural gas supplies about 60% of Chevron’s earnings. Based on its current production rates, the company’s reserves of 11.7 billion barrels should last roughly 12 years.
The other 40% of Chevron’s earnings comes from refineries, petrochemical operations and 7,800 gas stations in the U.S. Those refuelling stations operate under the Chevron and Texaco banners. Chevron directly owns 325 of those locations. Outside of the U.S., it supplies fuel to 6,000 gas stations.
In 2017, Chevron’s production rose 5.4% to 2.73 million barrels a day (63% oil, 37% gas) from 2.59 million barrels in 2016. About 75% of that output comes from fields outside of the U.S.
The higher production in 2017 was mainly because Chevron started up two big offshore gas projects on Australia’s northwest coast.
The company owns 47.3% of the first project, called Gorgon, and operates it. Its reserves should last 40 years. Chevron also owns 64.14% of the nearby Wheatstone project, with reserves that should last 30 years.
In all, the company spent roughly $44 billion on those projects. Both of them also include onshore facilities that will convert gas into a liquid for shipment to customers in Asia. Long-term contracts cover about 80% of the output from these two projects. That cuts their risk.
In addition to the higher production, Chevron is benefiting from higher oil and gas prices. As a result, its revenue in 2017 jumped 23.8% to $141.7 billion. The company’s earnings also improved to $4.85 a share (or $9.2 billion), while cash flow rebounded 57.6% to $10.81 a share.
Now that Chevron has completed work on Gorgon and Wheatstone, its spending on exploration and development will fall to $18.3 billion for 2018 from $18.8 billion in 2017.
Energy stocks: Kazakhstan field slated to be biggest development project in 2018
This year’s spending includes $5.5 billion on new growth projects. The biggest of those is the company’s plan to expand the Tengiz oil field in Kazakhstan by 35%; Chevron owns 50% of this field, while the government of Kazakhstan owns the other 50%.
The company will spend $3.7 billion on Tengiz in 2018. It expects to complete this project by 2022.
Another big growth area for Chevron is the Permian shale oil and gas basin in west Texas and New Mexico. In 2017, those operations produced 181,000 barrels a day, up 35% from 2016. Chevron aims to increase its Permian output to 450,000 barrels a day by 2021.
Chevron also announced a major discovery at its Ballymore offshore field in the Gulf of Mexico; it owns 60% of this project, while France’s Total SA owns the other 40%. As well, it recently confirmed another big discovery in the Gulf of Mexico called Whale (Chevron owns 40% of that field).
In addition, the company has decided to develop its properties in the Duvernay shale oil field in central Alberta. Initially, Chevron will develop 55,000 of the 330,000 acres it controls in that region. Commercial production could begin in 2019.
The company will also expand its 50%-owned petrochemical facility in Houston Texas, which started up operation last month. ConocoPhillips (New York symbol COP) owns the other 50%. The partners initially planned to complete the project by the end of 2017. But damage caused by Hurricane Harvey delayed the opening. Chevron’s share of the project costs is $3 billion.
The new facility should let the partners expand their U.S. plastics production by 40%. It will also benefit from the increased production and supply of low-cost natural gas from the shale properties of West Texas.
To fund all these new projects, the company continues to sell some of its less-important assets. Since the start of 2016, those sales have raised $8 billion.
Chevron’s solid balance sheet will let it keep investing in its operations. As of December 31, 2017, its total debt was $38.8 billion, or a moderate 19% of the company’s market cap. It also held cash of $4.8 billion.
Thanks to its improving outlook, Chevron raised its quarterly dividend by 3.7% starting with the March 2018 payment. Investors receive $1.12 a share, up from $1.08. The new annual rate of $4.48 yields 3.7%. The company has now increased its dividend each year for the past 31 years.
Chevron will likely generate cash flow of $14.36 a share in 2018. The stock trades at a reasonable 8.4 times that forecast.
Recommendation in Wall Street Stock Forecaster: Chevron is a buy.
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