Chevron Sticks to Shale Exploration Despite Low Prices

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Despite low natural gas prices, Chevron‘s (NYSE:CVX) looks intent on pushing into the natural gas market in the U.S. The company plans to double its drilling in the Marcellus play this year while also drilling a few exploration wells in the Utica play despite gas prices touching their lowest point in a decade, making shale exploration less profitable. [1] Chevron’s decision to press on with shale exploration mirrors that of rival Exxon Mobil (NYSE:XOM), which has decided against production cuts. Companies like ConocoPhillips (NYSE:COP) on the other hand have announced that they would reduce spending on natural gas resources in North America. We are looking to revise our $109 price estimate for Chevron, which is in line with its current market price.

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Chevron like other energy majors was a late entrant in the domestic shale gas production scene. Given its deep pockets, the company plans to ride out the present low price market without pulling back exploration to increase its foothold in the American shale arena and push ahead with drilling in its acreage.

Despite the low profitability from its operations, Chevron is increasing its drilling in the area as it seems to be more focused on acquiring technical know-how and expertise. [1] The energy major is keen to export the shale rush to European markets such as Poland and countries in Latin America. Gas prices in international markets are much higher than those in the U.S., and Chevron has been actively pursuing options to begin shale production in markets in Europe and China.

With Exxon and Chevron going ahead with gas production despite low prices, the oversupply situation in the U.S. market may continue to last. Analysts are expecting some consolidation in the natural gas industry, [1] which may help bigger players like Chevron to consolidate their footprint in the U.S. natural gas market. With gas prices set to rise in the long term, its commitment to natural gas exploration adds significant value to the company as depicted by our breakup of its value.

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Notes:
  1. Chevron Plays Catch-Up in Shale Gas, WSJ [] [] []