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Why Investors Should Not Be Worried About Chevron's Massive CapEx
Posted by: Sarfaraz A. Khan (IP Logged)
Date: December 7, 2013 12:23PM

One of the world’s leading integrated energy companies, Chevron (CVX) has been spending enormous amounts of cash on some of its biggest projects to ramp up its production of oil and gas. As a result, the company has not returned as much cash to shareholders, through dividends and buybacks, as they would have liked. Following the global financial crisis, investors have favored companies with attractive dividends and buyback programs, as opposed to companies like Chevron, who invest in their long term future. This is one of the reasons why this oil giant’s shares have remained under pressure, despite having attractive long term growth prospects.

Going Over the Budget

In its most recent quarterly results, Chevron reported a 25.6% year-over-year increase in capital and exploration expenses to $10.59 billion. A significant portion of this increase was attributed to the company’s operations in the international markets, where its spending grew by 28% to $7.84 billion. In the U.S, Chevron spent around $2.7 billion, showing an increase of 18% from the same quarter last year. Overall, in the first nine months of the current year, Chevron has increased its capital and exploratory expenditure in the international markets by 32% to $21.3 billion and in the U.S by 18% to $7.6 billion.

Moreover, the current data for the first nine months clearly shows that capital spending in 2013 is going to be higher than its previous estimates, due to some of the land acquisitions. Chevron’s management believes that their spending will be 10% higher than its planned $36.7 billion. Adding 10% to this budget will bring the total capital spending for the current year to around $40 billion. These higher levels of capital expenditures will likely continue in the coming years. For the next year, the capital budget will likely be in the range of $33 billion to $36 billion.

Going Above The Industry Leader

Interestingly, in the previous quarter, Chevron’s capital expenditure was even higher than the world’s biggest listed energy major Exxon Mobil (XOM). Exxon Mobil is $180 billion bigger than Chevron, produces much higher volumes of oil and gas, and earns nearly twice as much in revenues as Chevron. However, in the first 9 months of 2013, Exxon Mobil’s capital spending rose 19% to $32.57 billion while Chevron spent $28.92 billion, up 28% from last year. Moreover, in the previous quarter, Chevron spent nearly $100 million more than Exxon Mobil. More than 90% of Chevron's spending goes towards the upstream sector.

In other words, despite its considerably smaller size, Chevron could end up spending as much as Exxon Mobil in capital and exploratory expenditure in the current year. Given that the company is committed to keeping this high level of spending, this trend will likely continue in the coming years.

So how is Chevron keeping up with the massive capital spending budget of the industry titan Exxon Mobil? Unlike Exxon Mobil, which has significant exposure towards the struggling domestic natural gas sector, Chevron is more about oil and gets higher profits from there. As a result, despite the massive difference in their size, both companies have relatively little difference in cash flows. Even with lower production and revenues, in the previous quarter, Chevron managed to generate cash flows of $10.3 billion as opposed to Exxon Mobil’s $13.6 billion.

European Rivals

Unlike the American oil majors, the European oil major BP Plc (BP) will slowly increase its capital expenditure, amid the ongoing trial related to the Gulf of Mexico’s oil spill. BP’s annual capital expenditure will be around $24 billion in 2014 and will increase to $27 billion by 2020. The business still has to spend a lot of cash to shareholders to restore their confidence.

On other hand, some of the companies like Total S.A. (TOT), which has recently become the third biggest oil company from Europe after its market-cap surpassed that of BP will decrease its capital expenditure after years of high spending. For the current year, Total will spend around $28 billion but will reduce its annual expenditure to around $24.5 billion between 2015 and 2017.

Long Term Future

The demand for oil is expected to increase by 23% and to tap into this demand; Chevron would require additional production of around 65 million barrels per day by 2035. In other words, the company needs to pump 390 billion barrels of new oil over the next 25 years. Moreover, according to EIA, the natural gas demand will also increase by almost 43% by 2035, which will make it an attractive sector in the coming years .

There are enormous opportunities of growth lying ahead, which is why Chevron is spending cash aggressively. The business has lots of projects in its pipeline, through which, Chevron will be able to significantly increase its output.

Chevron currently has around 50 projects in its pipeline of over $250 million that will come online by 2017. Chevron has invested more than a $1 billion in 16 of these projects. Its large deepwater projects at the Gulf of Mexico will come online by the end of next year. The massive Gorgon LNG project is expected to begin in 2015 and Wheatstone LNG shipment project is expected to start in 2016. Furthermore, through investment in through Shale and other unconventional plays, Chevron will add more than 100,000 barrels per day to its total production through 2017.

In short, due to its massive capital spending, Chevron will generate significant returns in the long run.

Notes:

Chevron Jefferies Global Energy Conference Transcript [Pdf]

Exxon Mobil Q3 2013 Earnings Release

Chevron Q3 2013 Earnings Release [Pdf]

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.


Stocks Discussed: CVX, XOM, BP, TOT,
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