What Will Drive Chevron’s Value In The Near Term?

by Trefis Team
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With the rebound in commodity prices, Chevron (NYSE: CVX), the US-based integrated energy company, has witnessed a rise in its upstream revenues as well as earnings. Given the optimistic outlook for commodity prices, the company expects to leverage the rising prices by expanding its oil and gas output in the range of 4% to 7% in 2018 (excluding asset sales), at $60 per barrel Brent price. For this, the company plans to ramp up its operations in the Permian basin, which is one of the most coveted oil plays in the US, due to the superior quality of reserves and low cost of production in the region. We believe Chevron’s operations in the region are likely to contribute a large portion of its value in the coming years. In this note, we discuss how the company’s Permian operations are expected to be a key driver of its value going forward.

We currently have a price estimate of $125 per share for the company, which is 4% higher than its market price. View our interactive dashboard – Chevron’s Price Estimate and modify the key drivers to visualize the impact on the company’s valuation.

Focus On Permian Basin

Chevron has an acreage of over 1.5 million in the Midland and Delaware Basin, two of the most prominent oil plays in the Permian Basin. Since the basin is known for the abundance and superior quality of its oil reserves, the company enjoys a significantly low cost of production in the region. This implies that the economic returns of its output from the region are notably higher in comparison to that of other plays. Based on the company’s estimates, the IRR for its Permian investments is more than 30%, which is materially higher compared to other plays.

Given the remarkably high returns, Chevron expects the capital payback time for these assets to be roughly 2 years from the initial investment, which is evidently lower than its other assets. Also, the company anticipates the cumulative cash flow over the life of these assets to be nearly two times the capital cost of developing them. Thus, in order to enhance its profitability and cash flows, the company plans to meaningfully expand its operations in the region. Currently, the company operates 19 rigs in the area, and aims to increase this number to 20 rigs by end of 2018. Further, the oil major is using petro-physical technology and applying data analytics in the region to enhance the operational efficiency of its wells. For this reason, the company’s unconventional production in the Permian has been exceeding its own expectations so far.

Thus, we believe that Chevron’s strategy to expand its Permian operations to leverage the low cost of production and high quality reserves will work in its favor. The company’s relentless efforts to enhance the capital efficiency of its wells in the region, coupled with a timely recovery in commodity markets, will prove to be an added upside for the company in the long term. In fact, the Permian boom is likely to be instrumental in achieving the company’s production targets for the next few years, and will be a key factor driving its long term value.

 

Do not agree with our forecast? Create your own price forecast for Chevron by changing the base inputs (blue dots) on our interactive dashboard.

 

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