With crude oil prices struggling to recover, large integrated oil producers offer investors a more secure way to gain exposure to oil.
This major U.S. firm continues to increase production thanks to a portfolio of productive properties around the globe. It can also count on steady revenue from refineries, petrochemical plants and gas stations. The company is selling some less-important assets while it funds a series of promising new projects. In the meantime, it can reward shareholders with $3 billion in annual share buybacks as well as a dividend raised each of the past 31 years, and yielding a high 4.2%.
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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 80% of Chevron’s earnings. Based on current production rates, its reserves of 11.7 billion barrels should last roughly 12 years. The remaining 20% of earnings comes from refineries, petrochemical operations and 7,700 gas stations in the U.S.
Chevron expects its average production will rise between 4% and 7% from 2018 to 2020. That’s mainly due to rising output at its shale oil properties in the Permian Basin of West Texas and New Mexico. The company is also doing a good job keeping its operating costs down. As a result, its free cash flow (regular cash flow less capital expenditures) will likely rise to $14 billion in 2018 from $8 billion in 2017.
The company is now looking at building a new oil refinery near Houston. That would help it process oil from its properties in the Permian Basin. In the third quarter of 2018, Chevron’s Permian production jumped 80% from a year earlier.
Processing that oil closer to where it was produced would lower Chevron’s costs. Moreover, its other refineries in Mississippi and California mainly handle heavier grades of crude compared to the lighter oil from the Permian.
Meanwhile, Chevron continues to sell some of its less-important assets to focus on its main oil and gas operations. As part of that plan, Chevron is reducing its European portfolio of assets. Recently it sold its 40% stake in the Rosebank offshore oil discovery in the North Sea to Norwegian energy multinational Equinor. The price was not disclosed.
The company is also planning to sell its operations in Azerbaijan. Those consist of its 9.75% stake in the Azeri-Chirag-Gunashli offshore oilfield in the Caspian Sea and its 8.9% interest in the Baku-Tbilisi-Ceyhan pipeline. It pumps crude oil from the Caspian Sea to the Mediterranean.
Chevron would probably use the cash to fund other new projects. Those include the Tengiz oil field in Kazakhstan. The company already holds a 50% stake in Tengiz; the Kazakhstan government owns the rest. Chevron will have spent $3.7 billion on the project this year and hopes to complete Tengiz by 2022. To put that amount in context, the company’s overall earnings in the third quarter of 2018 were $4.7 billion, or $2.44 a share.
The proceeds from these sales will also help the company with its plan to buy back $3 billion worth of its common shares annually.
Energy stocks: Offshore gas projects in Australia benefit from long-term contracts
In 2017, Chevron started two big offshore gas projects in Australia.
The company owns 47.3% of the first project, called Gorgon, and operates it. Its total production capacity is 2.6 billion cubic feet of natural gas per day, and 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.
Chevron will also follow through on a major discovery made earlier this year 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.
A solid balance sheet will let Chevron continue to invest in its operations. As of September 30, 2018, its total debt was $36.1 billion, or a moderate 18.0% of the company’s market cap. It also held cash of $9.6 billion.
Chevron has raised its dividend each year for the past 31 years. Over the last 5 years, it has increased its dividend by an average of 4.5%.
It last raised its quarterly dividend with the March 2018 payment. Investors now receive $1.12 a share. The annual rate of $4.48 yields 4.2%.
Recommendation in Wall Street Stock Forecaster: Chevron is a buy.
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