Chevron Snaps Up More LNG Business As Japan Pulls Out Of Nuclear
Oil major Chevron (NYSE:CVX) signed a contract with Japanese utilities company Tohuku Electric Power to supply up to 1 million metric tonnes of Liquefied Natural Gas (LNG) from its giant Wheatstone project in Australia. [1] Japan has become a major market for LNG fuel after the country has moved away from nuclear energy following the Fukushima disaster last year. Last week, the country completed the shut down of all its nuclear power plants, which contributed to about 30% of its electric power generation capacity before the 2011 earthquake. Japanese utilities providers are shifting to gas powered plants to bridge the shortfall, getting into long term contracts with Chevron and other majors like ConocoPhillips (NYSE:COP), who are developing multi-billion dollar LNG facilities in Australia to meet the rising energy demand from Asia.
We have a $109 price estimate for Chevron, which is at 5% premium to its current stock price.
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LNG demand
Chevron is involved in two massive LNG projects in Australia scheduled to begin shipments over the next few years. With the latest contract, the company has managed to lock in about 80% of the output [1] from its $29 billion Wheatstone project in long term sales contracts. It is also planning to being marketing gas output from a proposed expansion of the larger Gorgon project as well. LNG demand from Japan has jumped by almost 27% for year ended March 2012 over the previous year. Booming gas consumption from the earthquake prone country has pushed up international LNG prices and added to the demand for contracts from upcoming Australian projects. Chevron is already considering expanding the capacity of both its projects with a focus on the rising energy demand from fast growing Asian markets.
Cost escalation
With more than 12 LNG projects under construction in Australia, developers are facing severe cost escalations because of scarcity in the labor market and the appreciation in the Australian dollar. Chevron is hopeful that can manage to keep costs under control by switching teams between its two projects in the country. Sales of natural gas and LNG constitute a significant percentage of our price estimate for Chevron.
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