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Investment Overview for Chevron (NYSE:CVX)
WHAT HAS CHANGED?
- Increased focus on controlling capex amid lower oil prices
Controlling capital expenditures while maintaining modest growth prospects, is the highest priority for Chevron right now, primarily due to the changed crude oil price environment. The company’s total net capital expenditures have soared from around $19.7 billion in 2009 to almost $34.6 billion in 2014. Most of the incremental capital expenditures have gone into the development of deepwater hydrocarbon reserves and the construction of giant liquefied natural gas (LNG) plants in Australia, where cost structures have elevated significantly over the past few years due to rising labor costs. The gross cost estimate for the Gorgon LNG project has risen by more than 45% since 2009, to $54 billion today.
However, in view of the changed crude oil price environment, Chevron is taking measured steps to significantly reduce the level of its absolute capital expenditures. The company plans to reduce its total gross annual capital expenditures by around $10 billion by 2017. It also increased its divestment target by 50% to $15 billion by 2017. Therefore, we expect the company's net upstream capital expenditures to decline by around 24.5% from $30.1 billion in 2014 to $22.7 billion in 2017. Beyond 2017, we expect the company's adjusted upstream EBITDA growth to outpace its net investments in the upstream business, leading to a gradual decline in its Upstream CapEx as a percent of Upstream EBITDA.
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 around 51.6% in 2009 to 52.7% in 2014, primarily reflecting the increase in average price realizations for liquids (Crude oil & NGL). Going forward, we forecast Chevron's Upstream EBITDA Margin to decline in the short to medium term because of lower oil prices, and then gradually increase to around 61% by the end of our forecast period, on a moderate recovery in global crude oil prices. However, if prices do not increase at the rate projected, and EBITDA margins only increase to around 50% by the end of our forecast period, there would be a 10% downside to our Trefis prices estimate. On the other hand, if prices increase more than expected, resulting in a higher EBITDA margin of 66%, there would be a 5% upside to the Trefis price estimate.
- Downstream EBITDA Margin: Chevron's downstream division, which primarily manufactures and sells refined products and petrochemicals, constituted ~50% of the company's operating revenues but just around 14% of its total EBITDA in 2014. This is primarily due to the low EBITDA margins of the division. EBITDA margins for the division depend on the price differential between input (crude oil, ethanol, etc.) and output (gasoline, kerosene, ethylene, etc.). Going forward, we expect downstream margins to improve in the short to medium term, due to lower oil prices, but remain under pressure (at around 1.2%) in the long run due to overcapacity in the global refining market and declining demand for gasoline in developed markets. However, if Chevron's downstream EBITDA margins fall to lower levels, such as to 0.5%, there would be a 5% downside to the Trefis price estimate. On the other hand, in a scenario where downstream EBITDA margins increase and reach around 2% by the end of the forecast period, due to a combination of higher growth in demand for refined products in emerging markets and a slower decline in petroleum fuel consumption in the developed economies, there could be a 5% upside to our current price estimate for Chevron.
For additional details, select a driver above or select a division from the interactive Trefis split for Chevron at the top of the page.
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 the Chevron, Texaco, and Caltex brands.The company is also involved in pursuing alternative energy solutions.
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 52.7% in 2014 compared to just around 0.8% 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 2014, the company's average selling price for crude oil was around $89 per barrel when average production costs were only $17.70 per barrel.
Increasing costs associated with upstream activities
Despite the volatility in crude oil prices, costs associated with the exploration and production of hydrocarbons have risen consistently over the last few years. This is primarily because of the fact that it has gotten increasingly difficult to find and develop hydrocarbon reserves. According to the latest oil and gas reserves study published by EY, finding and development costs that include costs associated with unproved property acquisition, exploration, and development of proved reserves, increased at more than 14% CAGR between 2009 and 2013, to $22 per barrel of oil equivalent (BOE). This has been primarily due to the growing complexity of upstream 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. Chevron's net upstream capital expenditure has increased from $19.7 billion in 2009 to $34.6 billion in 2014.
It is estimated that a large part of the world's oil reserves have already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.
However, many institutions such as the International Energy Agency (IEA) believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand of energy will be met at all times to come.
Improvements in technology
Due to limited underlying growth in product demand, there has been a movement in recent years towards increasing the complexity of refineries rather than expanding capacity. In the U.S., no new refineries have been built since 1980, however, improvements in process design and technology has seen capacity increase around 1% per year.
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. In addition, 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, is also increasing.
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.
See more on: DCF Methodology
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