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Investment Overview for Chevron (NYSE:CVX)

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1. Strong Production Growth

The company's total production rose by more than 5% in 2017, driven by the production increases from its shale and tight properties in the Permian Basin in Texas and New Mexico. The company has a pipeline of over 20 projects that are likely to add roughly 2,150 thousand barrels of oil equivalent per day (MBOED) over the next 3-4 years. Of these projects, more than 80% are either operational or are expected to come on-stream in 2018. Higher production, coupled with higher price realization should lead to strong growth in the company's top line through the rest of the decade.

2. Continued Focus On Reducing Costs

In order to sustain its profits, Chevron has made significant headway in bringing down its operational costs over the last two years. The company managed to reduce its operating costs from roughly $30 billion in 2014 to $24 billion in 2017, a decline of almost 20% in three years. The company will continue to restrict its costs in 2018 and beyond, which will boost its margins in an improving price environment. Accordingly, we expect the company's profits to rebound to pre-2014 levels over the next few years, assuming that these cost reduction initiatives are successfully implemented and are accompanied by a steady recovery in the commodity markets.

3. Increased Focus On Reducing Capital Expenditure

Chevron aims to expand its overall output at a steady rate over the next few years, while restricting its capital investment in the range of $17-$22 billion for the remaining years of this decade. The company's production growth will be driven by the ramp up of its Gorgon LNG and Wheatstone LNG Projects in Australia, and shale and tight rock drilling activity in the Permian Basin. However, the company's capital spending will depend closely on the recovery in the commodity markets.

Lower capital spending will allow the company to focus and invest its capital in high margin projects that will add upside to its stock in the long term.

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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). While the low commodity prices weighed on the company's top line in 2016, it managed to significantly reduce its operating costs during the year, which resulted in a boost in its EBITDA margin. The company recorded upstream EBITDA margin of 56% in 2016. However, the margins dropped to 47% in 2017, primarily due to higher commodity prices.
  Going forward, we forecast Chevron's Upstream EBITDA Margin to gradually increase to around 50% by the end of our forecast period, on the back of a steady recovery in global crude oil prices. However, if prices do not increase at the rate projected, and EBITDA margins remains at 45% by the end of our forecast period, there would be a 5% downside to our Trefis prices estimate. On the other hand, if prices increase more than expected, resulting in a higher EBITDA margin of 60%, there would be 10% 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.). In 2016, the company's downstream operations turned negative due to the recovery in commodity prices. However, it turned positive in 2017.
  Going forward, we expect downstream margins to improve in the short to medium term, but remain 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 increase and reach around 7.5% 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 10% 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.

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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.

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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 around 47% in 2017 compared to 2.5% EBITDA margin for its refined product sales during the year.

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 2017, the company's average selling price for crude oil was around $49 per barrel when average production costs were around $11.5 per barrel.

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Peak oil

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?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. 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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