Chevron (CVX, Financial), as well many other oil companies, are facing some severe problems mainly due to the struggling oil and gas markets.
Although oil is up considerably from its multiyear lows, it is still more than 60% lower than it was in 2014. As a result, Chevron posted a loss of $1.5 billion in the second quarter. In fact, the massive downturn took place just after a period of investment as the company was investing in new projects like Wheatstone LNG facilities in Australia as well as other multibillion-dollar mammoth projects.
The company’s cash flows have taken a big hit, which it was using to fund those developments and its dividend primarily, because of plunging oil prices. Moreover, to meet its financing requirement, Chevron has been forced to be dependent on its balance sheet, which was pretty robust before the oil crash.
Also, as the company has brought these developments projects operational, it has been unavoidably making too many huge capital investments to safeguard capital and sustain its 30 years of surging dividends.
Apart from this, the company detailed that Shale and tight production surged by 50,000 barrels per day, mainly because of growth in the Midland and Delaware Basins in the Permian with the Marcellus, Duvernay, Vaca Muerta and Liard Basins also displaying year-on-year growth.
Moreover, the decline of 48,000 barrels per day in the base business shows usual field drops and higher turnaround activity, moderately offset by new base business production from brownfield investments. The company’s upstream divestment programs displayed positive results, as it is having a positive impact on its production.
Most significantly, the company’s management said that it is putting in a lot of effort, will do anything to conserve its dividend and projects it will get back to paying for its capital expenses and dividends with operational cash next year even if oil prices remain in the range of $50 to $55 during that period.
Considering the company’s efforts, it should be able to improve its condition fairly soon.
Conclusion
Chevron needs oil to be 20% higher to be cash flow positive next year, which doesn’t look like a long shot given the stabilizing market. Although oil prices are expected to stay at these levels for the foreseeable future, it may rise to $50 per barrel by the end of 2017, thereby making Chevron a good buy at current levels.
Disclosure: No position in the stock.
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