What Is Chevron’s Operational Strategy For 2018? – Part 3

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In the last three years, the commodity downturn has not only hampered the profitability and cash flows of oil and gas companies globally, but has also raised concerns over their ability to meet their debt obligations. While some of the smaller oil and gas producers, who had huge debts on their books, had to file for bankruptcy in the last couple of years, large integrated energy companies, such as Chevron (NYSE:CVX), have managed to survive the oil slump, despite the rising debt on their books. In our previous analysis, What Is Chevron’s Operational Strategy For 2018? – Part 1 and Part 2, we have discussed how the company plans to grow its production and control its operating costs to sustain its margins. In this note, we will talk about how the company’s long term debt has risen over the last two years, and how it aims to bring it down in the coming years.

We have a price estimate of $118 per share for Chevron, which is slightly below its current market price.

See Our Complete Analysis For Chevron Here

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With the dawn of the commodity slowdown in mid-2014, Chevron’s profitability and cash flow position suffered severely. The company that was generating a net profit of roughly $11.09 per share in 2013, recorded a loss of $0.27 per share in 2016. As a result, the company was forced to raise long term debt from the markets in order to meet its capital spending and dividend payment needs. Accordingly, the company’s total debt rose from a little over $20 billion in 2013 to close to $46 billion in 2016. This caused the oil major’s net debt-to-equity ratio, a measure of company’s leverage, to jump sharply from 2.7% in 2013 to 27% in 2016.

However, Chevron acknowledges the rising investor concern over its large debt burden. Consequently, the company has been consistently working towards reducing the leverage on its books. For instance, the oil and gas producer has restricted its capital spending budget to $19.0-$19.8 billion for 2017 and to around $17-$22 billion for the remaining years of this decade, concentrated on the ramp up of its Gorgon LNG and Wheatstone LNG Projects in Australia, and shale and tight rock drilling activity in the Permian Basin. A lower capital investment will allow the company to focus at enhancing the results from its high-margin assets, while managing its cash flows to bring down its debt obligations in the coming quarters.

In addition to this, Chevron has been actively exploring opportunities to divest its non-core and low-margin assets to streamline its operations. The company had a target to close asset sales of $5-$10 billion between 2016 and 2017 and utilize the proceeds of these sales to pare down its long term debt obligations and optimize its capital structure. So far, the integrated energy company has managed to close sales of $2.8 billion in 2016 and $4.9 billion in 2017 year-to-date. This brings the total of Chevron’s divestment program to $7.7 billion, which is well within its targeted range. With a fair amount of cash infused by these deals, we expect the company’s long term debt to drop notably in the coming quarters.

Source: Chevron’s 3Q’17 Earnings Presentation

Having discussed various aspects of Chevron’s operational strategy for 2018 and beyond in this series of articles, we believe that the company’s high quality assets in one of the most coveted oil plays in the US, which when coupled with its efforts to improve its capital efficiency and reduce its operating costs, will enhance its profitability and future value. In addition, this will enable the company to strengthen its capital structure, by reducing its leverage, and in turn, boost its shareholder returns.

For other parts of this series, read –

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