Chevron needs more gas in the tank after 27% fall in profits
The US major's figures were worse than expected, but the company is pushing forward with gas
Stein's Law - named after the economist Herbert Stein - states that if something can't go on forever, it will stop. So Chevron found to its cost in the first quarter, when natural gas prices finally rose after bumping along near 10-year lows for five years, exposing the US major's reliance on crude oil production.
On 2 May, Chevron revealed its net profit in the first quarter was down 27% from a year ago at $4.51 billion. This was worse than analysts had been predicting, and compared poorly with its two biggest US rivals, ExxonMobil and ConocoPhillips."Our first quarter earnings were down from a year ago," Chevron chief executive John Watson said in a statement, "primarily due to lower prices and volumes for crude oil. Crude prices were tempered by global economic factors, while our current year production volumes were affected by weather-related, unplanned downtime, particularly in Kazakhstan."
Indeed, while ExxonMobil and ConocoPhillips benefited from a cold winter in the US that pushed gas prices up almost 50% in the first quarter from the year-earlier period, Chevron's average selling price for two key types of crude fell 4%. "Natural gas prices in the US were higher during the first quarter because of a cold winter. Spot Henry hub prices were up more than 45% year-on-year due to a decline in natural gas inventories in the domestic market. However, it would not have a huge impact on Chevron's consolidated earnings per share, as US natural gas contributes just around 8% to the company's total oil-equivalent production," explained analysts at Trefis in a research note.
The US' largest two oil and gas companies have actually benefited the least from the shale gas revolution that has turned the country from a net importer to a net exporter. Chevron produced 4% less oil and 3% less gas in the US during the first quarter than it did a year ago; ExxonMobil produced 5% less gas in the US during the first quarter.
As Gregory Zuckerman, author of the The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters, noted, in the 1990s, Chevron had a team of researchers looking at shale development, but work halted in 1997 as the technology needed to make it happen was considered too costly.
Instead, companies like Chevron embarked on a strategy of developing megaprojects, while selling off non-core assets and mature fields. Based on disclosures by Chevron, BP, Eni, ExxonMobil, Shell and Total, calculations by Reuters showed that these global majors saw their production of oil and liquids over the past decade fall by more than 17% to about 9.5m barrels a day (b/d), while refining capacity fell by 16% over the same period to about 15m b/d.
However, those megaprojects have suffered serious setbacks due to their complexity and cost. Look at Chevron's Gorgon liquefied natural gas (LNG) project in Australia: in 2011, Chevron announced a sharp $15bn or a 40% spike in the total cost estimate for the project from $37bn in 2009 to $52bn, on the back of rising labour costs, a stronger Australian dollar, productivity issues at the onshore site and weather delays. It further increased the total cost estimate by another $2bn in 2013.
In a statement accompanying the first-quarter results, Chevron said: "Significant progress has been made on the construction of our Gorgon and Wheatstone projects in Australia", pointing out that all five of the gas turbine generators have been installed in preparation for Gorgon's start-up in mid-2015.
Analysts say such news is crucial for Chevron. While output in the first quarter fell 2% to 2.59m barrels of oil equivalent per day (boe/d), its lowest first-quarter level since 2006, total production is expected to rise by about 20% to 3.1m boe/d by 2017 from around 2.6m boe/d last year. "The Gorgon LNG project forms the centrepiece of this aggressive production ramp-up plan, as it is expected to contribute over 200,000 boe/d to Chevron's net production volume," say analysts at Trefis.
Chevron has had a tough time of late with production growth - output since its 2001 takeover of Texaco peaked at 2.78m boe/d in 2010 - though some argue it has plenty of opportunity ahead. Chevron said in January it plans to keep spending roughly $40bn a year for the next several years. "Management has done a decent job of growing where it can. And with Chevron's rich pipeline of growth projects, which - I believe - should maintain long-term higher production levels, investors looking for a solid play in energy should consider Chevron following this recent dip," says one investor who declined to be named.
Chevron's average daily output for 2014 is expected to remain relatively flat as production growth from new projects started recently and the ones due to come online during the year are mostly offset by field declines. However, Watson said he expects new developments in Australia, Argentina, Azerbaijan, Myanmar and the Gulf of Mexico to boost global production as soon as next year. Chevron is also looking to make up for lost time in shale gas. It is already increasing gas output from the Marcellus shale in the eastern US and oil from the Permian basin in Texas.
Abroad, Chevron has started shale-gas exploration in Romania, which the US Energy Information Administration (EIA) estimates could hold 51 trillion cubic feet (cf) of shale gas. Chevron is also involved in Argentina, which the EIA reckons has the fourth-largest technically recoverable shale-oil reserves and the fourth-largest technically recoverable shale-gas reserves in the world.
In April, Chevron announced that it would spend an extra $1.6bn to develop with YPF shale oil and gas resources at the Vaca Muerta formation in Argentina's Neuquen province, which EIA estimates holds a recoverable resource of 16bn barrels and 308 trillion cf of gas. The first phase, a $1.24bn investment, was completed early this year, and production from the Vaca Muerta shale is now about 20,000 boe/d. "The second investment includes 170 wells, and longer-term plans could include up to 1,500 wells and an increase in production up to 50,000 b/d and 100m cf/d of natural gas," says Bill Newman, vice president of international oil and gas with Mackie Research Capital.