Chevron (ticker: CVX) explores for and produces crude oil and natural gas around the world. In 2013, the company’s worldwide net oil production averaged 2.60 million barrels equivalent per day, with about 25% of the production coming from the United States and the rest from more than 20 other countries. The company is engaged in every aspect of the industry, including exploration and production, midstream, chemicals manufacturing and power generation.
Chevron held its 2014 Security Analyst Meeting in New York City on March 11, 2014, and projects 2017 production will reach 3.1 MMBOEPD from 2013’s total of 2.6 MMBOEPD (roughly 20% increase). The production target is lowered from the company’s initial 2017 target of 3.3 MMBOEPD due to a drop in production due to price effects, less United States-based drilling, project delays and future uncertainty. Capital expenditures remain unchanged and will stay close to $40 billion through 2017.
Source: Chevron Analyst Day Presentation
CVX expects its cash flow from operations to exceed $50 billion in 2017 (roughly 43% higher than 2013’s total of $35 billion). Upstream resource inventory also rose by 67.8 billion BOE (4% increase) and 12 high impact wells are planned to be drilled in 2014. Asset sales through 2017 are expected to return roughly $10 billion.
What Will Happen by 2017?
As indicated by the chart below, the majority of CVX’s projects in the upcoming years will specifically focus on oil production in North America (particularly the Gulf of Mexico, Canada and the Permian Basin) and the enhancement of its LNG projects in the Asia Pacific. Its endeavors in North America and the Asia-Pacific will each account for 34% of capital spending through 2017, with Africa, Latin America, Europe, Eurasia and the Middle East garnering the remaining 32%. The Australia LNG projects will be a focus of its Asia-Pacific spending, which, in addition to deepwater opportunities, is projected to hit peak spending in 2014. Roughly 60% of capital will be allocated to upstream advancements through 2017.
Source: Chevron Analyst Day Presentation
Source: Chevron Analyst Day Presentation
Despite the LNG investment, CVX management said it has always been a liquids-focused company. Its resources flow in the United States has consisted of at least 60% liquids since 2004, which is enough to be the largest liquids producer in the country. Chevron’s stake hold in the Permian Basin has been a driver for boosting production, and the company has responded by increasing its interest.
Currently, CVX is the second-largest producer of the Permian and holds 1.9 million net acres in the region. Approximately 10% of the entire Delaware Basin is held by CVX. Production from the Permian is expected to nearly double by 2020, with rates forecasted to reach 250 MBOEPD on as many as 50 rigs. Much of the return is expected to be through organic development.
As noted by the chart below, the Gulf of Mexico and offshore Africa are each in line for eight new projects by the year 2020. While the attention to the Asia-Pacific appears to be less dominant on paper, CVX believes its operations in the region will add as much as 300 MBOPD in production once the LNG projects are fully operational. If achieved, the region would account for more than half of Chevron’s projected production increase by 2017.
Source: Chevron Analyst Day Presentation
Investing in Shareholders and Reserves
New recovery methods on its shale and tight resources have offset production declines. The company also credited its exploration success, which was 59% in 2012 and 56% overall since 2003, to restocking its reserves. Total exploration resource replacement since 2003 is 120%. Management said yearly production from its legacy assets actually declined by 14% in 2013 but its exploration and replacement efforts cut the decline to less than 3% overall.
CVX management said it will continue to direct cash flow into its stock repurchase program. The company has spent roughly $40 billion on repurchases since 2004, and management says the company has outpaced the entire S&P 500 index by nearly 50% for the same time period. CVX anticipates reaching $60 billion in cash flow by 2020 – an increase of roughly 70% compared to 2013.
CVX News Release (03.11.14) – Chevron Reaffirms Strategies, Highlights Performance, Portfolio and Future Growth
Click for CVX Presentation and Supporting Materials
Click for CVX Analyst Day Webcast
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Analyst Commentary
Bank of America Merrill Lynch Note – (3.11.14)
Future growth is dependent on Gorgon
If there is one lesson that underlines the twin strategy updates from ExxonMobil and Chevron over the last two weeks it is that, any attempt at precision based on management projections should be taken with a very hefty dose of salt. Chevron has followed Exxon, and is lowering production targets. Associated spending in 2015-17 now looks flat at 2014 levels. Notable is that CVX has reset the price deck for its production outlook to $110 from $79 previously and with an oil weighted portfolio CVX is now the most bullish amongst the large cap US oils on oil pricing. But perhaps the single most important issue for CVX is that net growth is now almost entirely dependent on startup of Gorgon where on- time delivery of all three trains by 2016 is also the basis for a projected improvement in unit cash margins.
At our price deck CVX is still burning cash
In summary, we have boiled CVX's analyst update down to a single issue - whether CVX portfolio can deliver a $15bn step up in cash flow over the next four years. Our preliminary analysis suggests that will be a challenge. At $110 oil, our analysis suggests this probably balances cash outflows by 2017; under our more conservative base case of $100 Brent - or worse still, at strip which remains the markets only line of sight for the commodity outlook - CVX still faces a material cash burn over the next five years that by our analysis leaves CVX's forward multiple range bound. It remains to be seen whether the market is prepared to acknowledge CVX's oil price optimism.
Investment case unchanged: Remain Neutral
On balance, Chevron's portfolio is leveraged to a bullish commodity outlook - but a $110 scenario would similarly benefit other major oils so that on balance, CVX's relative investment case does not materially change. A current yield of ~3.5% is not unattractive to warrant patience on the longer term execution, but absent conviction on sustained oil prices at current levels, this may serve to limit downside risk on what is still a longer-dated investment case. While we are Neutral on both, our 'big oil' preference within the US oil majors stays with XOM.
Raymond James Equity Research – (3.11.14)
Recommendation. We upgraded Chevron on February 4, based on overly negative sentiment in the wake of higher-than-expected near-term capital spending and weaker production guidance. Following yesterday's analyst meeting, we reiterate our Strong Buy rating, with Chevron remaining our top pick among supermajors and one of the only Strong Buys in Raymond James' global energy coverage universe. While the analyst day was somewhat of a mixed bag, we think it's enough to stabilize sentiment on the stock, supporting the potential for a modest catch-up trade over the next 6 to 12 months.
Despite 2017 haircut, production at inflection point. A key question ahead of the analyst day was if the 2017 target of 3,300 MBoe/d would be affirmed. Well, the target is being reduced to 3,100 MBoe/d, although a quarter of that is due to production-sharing effects ($110/Bbl Brent vs. $79 previously), and by definition, our model has higher volumes since we assume $100/Bbl long term. Another quarter is for "future uncertainties", arguably implying deliberate lowballing (reasonable given production disappointments over the past few years). There is also no credit for a lower organic decline rate (3% versus previous 4%). The new target still implies annualized growth of 4.5% through 2017 (the highest in the peer group) - as before, highly back-end loaded, as Gorgon (78% complete) ramps up in the second half of 2015 and Wheatstone (30% complete) in 2016.
Capital intensity has peaked. On the intensely scrutinized theme of capital intensity, the message is encouraging: 2013 is explicitly identified as the year of peak capital intensity (similar to the point made by Exxon last week). Spending in 2015-2016 is flattish with 2014, with North America and Asia-Pacific comprising 34% each. Although we had been hoping that spending would moderate ahead of 2017, even flat spending, in the context of rising production (mainly from high-margin volumes, especially LNG), means free cash flow would materially improve, all else equal. As detailed on page 2, we project FCF of $6 billion at $100/Bbl in 2016, vs. $(2) billion at $109/Bbl in 2013. While Chevron does not screen the best in absolute terms from an FCF angle, this needs to be seen in the context of a company with peer-leading organic resource replacement, 120% in 2003-2012.
Asset sale target set at $10 billion. It's not enough to make this a "breakup story", but the $10 billion asset monetization target for 2014-2016 represents an increase of nearly 50% from the 2011-2013 actual of $7 billion. This includes some U.S. midstream assets (just don't expect an MLP spinoff), but 80% will be upstream. While there is no explicit linkage, the $10 billion figure can be thought of covering two-thirds of the existing $1.25 billion/quarter share repurchase program. (Separately, we anticipate a ~10% dividend hike in April, on par with the 11% annualized average of the past decade.)
Valuation. Our $132.00 target price is based on a ~12.5x multiple to our 2015 EPS estimate of $10.39, above the historical (2000-2014) mean of 11.2x, which reflects what we believe will be a trough year for earnings. From a total return standpoint, the current dividend yield of 3.5% (close to Chevron's highest since 2012) should also be noted
UBS Financial Services Note – (3.11.14)
Reduces '17 volume outlook & guides to flat LT capex, in line with expectations
CVX lowered its 2017 production target to 3.1 MMBoed from 3.3 MMBoed (in line with consensus of 3.09 MMBoed & UBSe 3.055 MMBoed), driven by PSA price effects (-55 MBoed impact), less US gas drilling (-45 MBoed), project delays (-50 MBoed) & a cushion for future uncertainty (-50 MBoed). It maintained 2014 capex guidance of $39.8bn ($35bn "ex-affiliates"), and indicated spending should flatten in 2015-17 at ~$40bn, in line with UBSe & implying FCF deficits (after dividends) of $2-4 billion per annum from 2014-17 (vs. historical FCF surplus of ~$4.4bn per annum in 2003-12).
Other key takeaways from the Analyst Day:
1) expects to grow CF from operations to >$50bn in '17 (vs. $35bn in '13) assuming $110/Bbl Brent, above our $48bn estimate under the same price deck & ~$41bn at the NYMEX/ICE futures strip; 2) noted a reduction in base depletion rate from ~4% to 3%; 3) plans $10bn in asset sales from '14-16, vs. our $9bn forecast & $7bn in '11-13; 4) raised upstream resource inventory to 67.8 BBoe from 65 BBoe; 4) expects to drill 12 high impact (>100 MMBoe) exploration wells in '14; 5) signaled continued divi increases/buybacks despite swinging to a net debt position at YE13 (first time since '09)
Continue to prefer CVX to XOM given more attractive outlook to 2017
We maintain our neutral stance on the US Majors but prefer CVX to XOM given its superior long-term production & cash flow growth. Assuming $110/Bbl Brent (flat through 2017), we forecast CVX will deliver 5.4% per annum production growth from 2014-17 (vs. XOM's 2%), 17% cash flow growth (vs. XOM's 0%), and flat ROCE vs XOM's deterioration of 300 bps. And while CVX should generate negative FCF through 2015 to XOM's surplus, we project a similar FCF profile by 2017. Moreover, CVX's PE and EV/DACF multiples compress as we roll estimates forward to 2017, while XOM's are unchanged assuming $110/Bbl Brent and rise assuming the futures strip.
Valuation: $120 price target assumes 7x normalized DACF
CVX trades at 5.7x '14 EV/DACF, above its historical avg of 5.6 but a 3x turn discount to XOM. It is also valued in line with its hist avg relative PE vs the S&P 500.
