California-based Chevron (NYSE:CVX) recently announced the sale of its interest in some oil fields and pipelines in Chad to the country’s government for around $1.3 billion. This falls in line with its plan to divest some $10 billion worth of non-core assets by 2017. The company’s strategy is to focus on the 3 key areas of upstream growth i.e. liquefied natural gas (LNG), deepwater, and shale/tight reserves development while moderating its annual capital expenditures. 
Chevron is the second largest energy company in the U.S. after Exxon Mobil. The company manages its investments in subsidiaries and affiliates, for which it provides administrative, financial, management and technological support. This extends both to its U.S. subsidiaries and to its international subsidiaries, engaged in fully integrated petroleum, chemicals and mining operations, as well as power generation and energy services. It generates annual sales revenue of around $230 billion with a consolidated adjusted EBITDA margin of ~21.8%
We recently revised our price estimate for Chevron to $128/share, which is almost 12x our 2014 full-year GAAP diluted EPS estimate for the company.
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As a part of the recent deal, Chevron has sold its 25% non-operating interest in 7 crude oil producing fields in Chad’s Doba basin along with around 21% interest in two affiliates that own an export pipeline, which transports crude oil to the coast of Cameroon. The company’s average daily net crude oil production from these assets stood at 18,000 barrels last year, down from 22,000 barrels in 2012. 
It makes sense for Chevron to divest from its non-core assets with declining crude oil production, as it plans to ramp up its total hydrocarbon production going forward. The company expects to grow its average hydrocarbon production rate from around 2.6 million barrels of oil equivalent per day (MMBOED) in 2013 to 3.1 MMBOED in 2017. It expects to draw most of this production growth from the start-up and subsequent ramp-up of new liquefied natural gas (LNG) projects in Australia and Angola, and the development of deepwater reserves in the Gulf of Mexico and offshore Brazil. (See more on Chevron’s Deepwater prospects: A Look at Chevron’s Key Deepwater Projects)
Chevron is betting big on the global LNG market, spending billions of dollars in the construction of around 25 Million Ton Per Annum (MTPA) gross LNG capacity. The Gorgon LNG project, Chevron’s biggest LNG bet, forms the centerpiece of its aggressive hydrocarbon production ramp-up plan, as it is expected to contribute over 0.2 MMBOED to Chevron’s net daily production rate in the long run. (See more on Gorgon LNG: A Closer Look At Chevron’s Biggest Bet In The Global LNG Market)
However, soaring capital expenditures is the biggest valuation concern for Chevron right now. The company’s net capital expenditures have soared from around $17 billion in 2009 to almost $37 billion last year. More than 92% of this $37 billion was spent on upstream projects. This has been primarily due to the ongoing development of LNG projects in Australia, where cost structures have significantly elevated over the past few years due to rising labor costs. Gross cost estimate for the Gorgon LNG project has risen by more than 45% since 2009 to $54 billion today. 
This year, Chevron plans to slightly tone down capital investments as it plans to reverse the growing trend in favor of higher cash flows. According to the capital budget plan for this year, Chevron looks at spending around $2 billion less on leasing rigs, floating oil platforms, installing pipelines and repairing oil-refineries than it did last year. The recent asset sale in Chad would help Chevron reduce some pressure on its operating cash flows while continuing to progress the development of its long-term growth projects. Notes:
- Chevron Announces Sale Of Interests In Chad And Cameroon, chevron.com [↩]
- Chevron 2013 10-K Filing, sec.gov [↩] [↩]
- Chevron Announces $39.8 Billion Capital and Exploratory Budget for 2014, chevron.com [↩]