Oil major Chevron (NYSE:CVX) had a strong 2011 which saw its stock rise from $94 to $106 as the company continued to deliver success on the exploration side. Chevron is betting heavily on growth in energy demand from Asia and from China in particular with multibillion dollar liquefied natural gas (LNG) projects off the coast of Australia. LNG projects will take up the largest share of the company’s planned project spend over the next 10 years. Significant resources will also be dedicated to deepwater and conventional resources during the same period. The company expects total output to rise over the medium term after dropping slightly in 2011 as it has a strong line up of near term startups. High oil prices are also adding to the attractiveness of energy stocks as crude prices have been resilient to European worries throughout 2011 which has benefited other energy giants such as Exxon Mobil (NYSE:XOM) and BP (NYSE:BP).
We have a $109 price estimate for Chevron, which is slightly ahead of its current stock price.
Big LNG bets
Chevron holds a 73.6% stake in the $29 billion Wheatstone LNG project in Australia. It also owns a 47% stake in the $37 billion Gorgon project, which is one of the largest natural gas development projects in the world. The company is targeting growing energy demand from Asian markets with the development of these massive projects. Targeting the expected growth in LNG demand from Japan, South Korea and China, energy companies have announced projects investments totaling $120 billion to develop Australian gas reserves. LNG prices jumped 33% from March to September 2011 as the Fukushima disaster in Japan forced countries to reconsider the use of nuclear power plants. (See: Chevron’s $29 Billion Australian LNG Project is a Big Bet on Asian Demand)
Chevron has been particularly aggressive in its growth in emerging markets. The company now holds more than 50% of its total natural gas reserves in the Asia Pacific region. The company plans to sell most of the gas output from its projects to utility companies such as Tokyo Electric. The Gorgon project will start shipping LNG by 2016 while the Wheatstone project will go into production a year later.
Chevron is also combating a recent drop in liquids output with a strong pipeline of near-term startups. It plans to start 37 projects by 2014 where its net share will be greater than $250 million.  The company estimates that by 2017, it will be able to ramp up total output to 3.3 million barrels of oil equivalent / day (MBOED) from 2.763 MBOED in 2010. The company has a geographically diversified portfolio of production assets that are distributed across North America, Africa and Latin America, Europe, Eurasia and the Middle East and Asia Pacific. Each of the four principal regions contribute between 24 – 28% of the company’s total output.
We expect Chevron to increase its liquids output with additions from the U.S. Gulf of Mexico, Kazakhstan, Brazil, North Sea Claire Ridge project and deepwater prospects in Africa. Chevron is also rumored to be in talks with the Kurdish Regional Government regarding exploration in the semi-autonomous territory within Iraq.
Capital expenditures may rise
One of the risks facing Chevron is an escalation in capital costs in the future. Analysts have warned that the huge pipeline of projects in Australia could result in significant cost increases because of project delays, manpower shortages and risk of the Australian dollar appreciating. Increased scrutiny of deepwater projects could also raise the company’s cost of exploration. With oil prospects becoming smaller and more difficult to find and process, exploration costs are set to rise as a consequence. However, higher costs should be offset by the increase in oil prices.
Chevron’s entry into shale exploration will also push up its capital expenditures in the future. The company is already developing fields in Marcellus and three other plays across the U.S. while exploring prospects in the Utica and Duvernay plays.  Outside the U.S., Chevron is exploring shale prospects in Poland and a couple of other European countries.Notes: