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Investment Overview for Chevron (NYSE:CVX)
WHAT HAS CHANGED?
- Rising Debt Is A Growing Concern
Declining commodity prices have pulled down the cash flows of Chevron. This has made it difficult for the oil and gas major to meet its capital spending needs and sustain its day-to-day operations. This forced the company to raise about $16 billion to maintain its smooth operations. This, coupled with the deteriorating shareholders equity, has led to a sharp rise in the company's leverage. Thus, the company's ability to serve its long-term obligations has been reduced notably.
- Controlling Operating Costs To Maintain Operating Margins
The oil slump has weighed heavily on Chevron's profitability. For instance, the company's operating margin fell from 15% in 2014 to merely 3% in 2015. As a result, the integrated company aims to control its operating expenses through the use of advanced technology that will bring efficiency gains in its key basins. The company targets to reduce its operating costs by $5-$10 billion in 2016 compared to 2014, and will continue to curtail its costs over the next couple of years.
- Increased Focus On Reducing Capital Expenditure
Controlling capital expenditures while maintaining modest growth prospects, is the highest priority for Chevron in the current price environment. Thus, the company has reduced its total gross annual capital expenditures budget to $25-$28 billion for 2016, as opposed to the expenditure of more than $35 billion in 2015. Further, the company has cut down its capex expectations for the next year to $17-$22 billion, on the back of a weak outlook for the commodity markets.
- Asset Sale Program To Fund Capital Spending
In the wake of the ongoing commodity downturn and diminishing cash flows, Chevron has chalked out an asset sale program to receive a fair value for its non-strategic and/or non-performing assets. The company plans to utilize the proceeds from the asset sale to finance its capital spending requirements over the next couple of years. The company has a target of divesting $5-$10 billion of its assets by the end of 2017. Year-to-date, the oil and gas company has completed asset sales of $1.4 billion and is on track to achieve its target.
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 decreased from around 62% in 2012 to 45% in 2015, primarily reflecting the decrease 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 59% 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 11% downside to our Trefis prices estimate. On the other hand, if prices increase more than expected, resulting in a higher EBITDA margin of 65%, there would be a 7% upside to the Trefis price estimate.
- Downstream EBITDA Margin: Chevron's downstream division, which primarily manufactures and sells refined products and petrochemicals, constituted ~70% of the company's operating revenues but just around 26% of its total EBITDA in 2015. 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 3.5%) 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 1.5%, there would be a 6% downside to the Trefis price estimate. On the other hand, in a scenario where downstream EBITDA margins increase and reach around 4.5% 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 6% 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 45% in 2015 compared to just around 2% 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 2015, the company's average selling price for crude oil was around $50 per barrel when average production costs were around $20 per barrel.
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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