Liquids Production is 5x as Valuable as Natural Gas Production for Chevron
Chevron (NYSE:CVX) is one of the largest energy companies in the world and engages in several businesses like exploration & production of oil and natural gas, refining, transportation, trading and chemicals. The company competes with other established oil producers like Exxon (NYSE:XOM), ConocoPhillips (NYSE:COP), BP (NYSE:BP) and Anadarko (NYSE:APC).
Our price estimate for Chevron stands at $105, which is about 10% above market price.
Chevron’s upstream business, which is very profitable, consists primarily of liquids and gas production along with trading activities. While we estimate that trading activities are significant, it is worthwhile to evaluate relative contribution of liquids and natural gas to Chevron’s stock.
Liquids are 5 Times as Valuable as Natural Gas to Chevron
Liquids essentially consist of crude oil and natural gas liquids, with crude oil by far the primary component. We estimate that crude oil & natural gas liquids production constitutes close to 39% of Chevron’s equity value. Comparatively, natural gas production constitutes approximately 8%.
Why such a big difference? The reason is that demand for crude oil is much higher worldwide compared to natural gas and, therefore, production levels and pricing of crude oil are higher.
Higher Liquids Production
If we compare barrels of oil-equivalents (which is a common unit that can be applied to both natural gas and crude oil), we find that Chevron’s crude oil production was 2 times the natural gas production for the U.S. in 2009. [1] For the international division, crude oil production was approximately 2.3 times that of natural gas. [1] Below you can see how change in crude oil & natural gas liquids production volume affects Chevron’s equity value.
See our full analysis and $105 price estimate for Chevron
Higher Liquids Price
Not only is crude oil’s quantity produced higher, the pricing is also beyond that of natural gas. If we again use barrels of oil-equivalent as a common unit, we note that Chevron’s average crude oil pricing for the U.S. in 2009 was about 2.4 times the pricing for natural gas. [1] This figure was close to 2.3x for international production. [1] Below you can see how change in crude oil pricing affect Chevron’s stock value.
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