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Investment Overview for Chevron (NYSE:CVX)
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Below are key drivers of Chevron's value that present opportunities for an upside or downside to the current Trefis price estimate for Chevron:
- Upstream EBITDA Margin: Chevron's upstream division's EBITDA Margin increased from in 32.1% in 2008 to 37.8% in 2012, primary reflecting the increase in average price realizations for liquids (Crude oil & NGL). We currently estimate upstream EBITDA margins to gradually decline to around 40% by the end of the Trefis forecast period as a larger proportion of total production is derived from more expensive unconventional sources such as shale, oil sands and the Arctic Sea. We project costs to increase at a faster rate than prices, resulting in a gradual decline in EBITDA margins. However, if costs do not increase at the rate projected, and EBITDA margin gradually increases to around 42.5% by the end of our forecast period, there would be a 10% upside to our Trefis prices estimate, this would On the other hand, if costs increase more than expected and oil & gas prices do not improve, resulting in a lower EBITDA margin of 35.1%, there would be a 10% downside to the Trefis price estimate.
- Downstream EBITDA Margin: While Chevron's downstream division, which primarily manufactures and sells refined products and petrochemicals, constituted 47.5% of company revenues but just 4.4% of EBITDA in 2012. This is primarily due to the low EBITDA margins of the division. EBITDA margins for the dvisiion depend on the price differential between input (crude oil, ethanol etc.) and output (gasoline, kerosene, ethylene etc.). Going forward, we expect downstream margins to gradually improve to around 5.5% over the Trefis forecast period. However, if downstream EBITDA margins fall to lower levels going forward, say to 3%, there would be a 10% downside to the Trefis price estimate. On the other hand, in a scenario where downstream EBITDA margins continue to increase and reach around 7.5% by the end of the forecast period due to a combination of increasing demand for refined products in emerging markets and continued global refining capacity underutilization, there would be a 10% upside to the Trefis forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Chevron at the top of the page.
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Chevron Corporation is the second largest energy company in the U.S., after Exxon Mobil. The company manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to U.S. and international subsidiaries that engage in fully integrated petroleum, chemicals and mining operations, as well as power generation and energy services.
Chevron has operations in 180 countries along with a strong network of retail gas stations under Chevron, Texaco, and Caltex brands.The company is also involved in pursuing alternative energy solutions.
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Crude Oil and Natural Gas Liquids production is by far the most valuable segment for Chevron for the following reasons:
Higher profitability compared to downstream activities like refining
Although, the revenues attributed to crude oil and NGL production are less when compared to downstream businesses like refined product sales, the profitability is much higher. We estimate that EBITDA margins for crude oil and NGL production were a little over 38% in 2011 compared to only 4.6% for refined product sales.
The difference in margins is attributable to the fact that the cost of production per barrel is quite low for crude oil compared to its selling price. For 2011, the company's average selling price for crude oil was around $103 per barrel when average production costs were only $10 per barrel.
Higher production and pricing compared to Natural Gas
Although Natural Gas Production and Crude Oil and NGL Production have similar margins, the production volume (when measured on a comparable basis) and pricing is higher for crude oil. While Chevron's consolidated subsidiaries produced around thousand barrels of crude oil and natural gas liquids per day globally in 2011, natural gas production was less than half of it when measured on oil-equivalent basis (6000 cubic feet of natural gas being equivalent to 1 barrel of oil when seen from energy content perspective). Additionally, the pricing per barrel of oil was more than twice when compared to the equivalent energy amount of natural gas.
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Chevron is trimming its downstream business,plans to focus more on upstream
In early 2010, Chevron announced its business strategy of trimming down its downstream business which consists of refining, marketing and transportation operations. This segment has struggled when it comes to profitability. We estimate that EBITDA margins for this segment declined from 6.6% in 2006 to just 2.2% in 2009. Margins recovered to 4.6% in 2011. The company has been cutting employee count in its downstream business and plans to focus on the more profitable Oil & Natural gas exploration and production business.
Chevron is also embracing alternative energy solutions
Even though Chevron's business is dependent on non-renewable energy sources such as crude oil and natural gas, the company is also focused on embracing alternative energy solutions. Chevron's Global Power Company has 13 power assets worldwide with a total power generation capacity of 3,100 megawatts. 12 of these utilize recovered waste heat to produce electricity, and the 13th is a wind farm. Chevron is also involved in R&D in solar power generation and alternative fuel sources such as biofuels and fuel cell technology.
Increasing costs associated with upstream / downstream activities
The costs associated with constructing new oil and gas upstream facilities have reached a new record high, according to an analysis by Cambridge Energy Research Associates (CERA). According to the analysis, costs related to the extraction of oil & gas has doubled since 2005.
This has been primarily due to several reasons:
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Increasing commodity prices:Prices of items such as fuel, chemicals, steel etc. have risen sharply in the last few years as demand grew in emerging markets. Some refineries typically use 5-7% of their feedstock as fuel to run refineries. Firms are increasing focus on energy efficiency to drive this down
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Complexity of projects:Various oil companies have embarked on different projects to extract oil such as deepwater, GTL, oil sands, etc. This has led to longer development time lines which have in turn resulted in higher costs.
Improvements in technology
Many analysts forecast that global oil production will peak in the next few years and then decline, following the Hubbert Curve. However, new exploration methods and developments in extraction technology have led to the discovery of new reserves in unconventional forms (shale, oil sands) in previously unviable locations (deep water, Arctic). As a result, there is expected to be continued growth both in discovered reserves as well as the percentage of reserves which are economically recoverable.
There has been substantial improvement in refinery technology as well. The early refineries that were established were mainly used to process light sweet crude resulting in an increase in demand for light sweet crude. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. There has been an increasing interest in the development of new cost effective methods for extracting and transporting heavy crude oil for refining into valuable light and middle distillate fuels.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
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