Chevron’s Move to Exit Coal Mining Makes Sense
Chevron (NYSE:CVX) is one of the largest energy companies in the world, engaging in a variety of businesses like the exploration & production of oil and natural gas as well as refining, transportation and trading. 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 $104, which is in line with the market price.
We have previously talked about Chevron trimming down its downstream business and focusing more on upstream, with a push into natural gas. It seems that Chevron is on a spree to better align its resources to focus on profitability. This could well be the reason behind its recent announcement in which the company expressed interest in selling its coal mining business.
Chevron’s Mining Business At a Glance
Chevron operates both coal and molybdenum mining businesses. The production occurs in the U.S. while sales are conducted globally. Chevron owns and operates a surface coal mine in Wyoming, an underground coal mine in Alabama and a surface coal mine in New Mexico. These are the three mines that the company is thinking about selling. At the end of 2009, Chevron controlled about 193 million tons of coal reserves (proven and probable) in the U.S. [1] The company produced about 10 million tons of coal in the same year. [2]
How Big is It?
How big is the coal mining business for Chevron? This is a tricky question, but it’s not hard to guess that it’s very small when compared to upstream and downstream oil & natural gas operations. The company reports its multiple small businesses like mining, power generation and energy solutions together, and these comprise a mere 1% of Chevron’s overall revenues.
And if we apply the rough coal pricing of competitors like Massey (NYSE:MEE), and use Chevron’s production volume of 10 million tons, it seems that coal mining revenues could actually represent less than 0.5% of Chevron’s overall revenues. This is quite small.
Moreover, what is not clear is whether Chevron’s mining operations are even profitable or not. According to Chevron’s reporting, its ‘Other‘ business segment that includes mining, power generation and energy solutions, is a loss-making business. We include this in the form of indirect costs in our valuation model. If mining operations are loss-making on a stand-alone basis for the company, then it makes all the more sense for Chevron to sell this segment and focus on core operations that effectively carry its entire stock value.
Why Sell?
Chevron might want to further align itself with its core businesses of oil & natural gas exploration and production. The company also noted that new coal technologies were developing too slowly to inspire further pursuit of the coal industry. Another possibility is that mining may not have been profitable for Chevron, although this can not be confirmed with available data. But if trimming of downstream operations is any indicator, it seems that Chevron wants to reduce investments in low margin businesses.
See our full analysis and $104 price estimate for Chevron
The company owns and is the operator of a surface coal mine in Kemmerer, Wyoming, an underground coal mine, North River, in Alabama,
and a surface coal mine in McKinley, New Mexico. The company continues to actively market for sale its coal reserves at the North River
Mine and elsewhere in Alabama. The decision was made in late 2009 to suspend production at the McKinley Mine, and conduct reclamation
activities in 2010. The company also owns a 50 percent interest in Youngs Creek Mining Company LLC, which was formed to develop a coal
mine in northern Wyoming. Coal sales from wholly owned mines in 2009 were 10 million tons, down about 1 million tons from 2008.
At year−end 2009, Chevron controlled approximately 193 million tons of proven and probable coal reserves in the United States, including
reserves of low−sulfur coal. The company is contractually committed to deliver between 7 million and 9 million tons of coal per year through
the end of 2012 and believes it will satisfy these contracts from existing coal reserves.
- Chevron’s 10-K report [↩]
- APNewsBreak: Chevron exiting coal mining, Yahoo News, Jan 28 2011 [↩]