Chevron A Solid Play On Strength Of LNG
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With the collapse of dry natural gas prices in the U.S. and what some see as an imminent and similar collapse in liquid natural gas prices, Chevron (NYSE: CVX) and Royal Dutch Shell (NYSE: RDS-A), among others, are working to increase their liquid natural gas production and export facilities in the Asia Pacific region. Demand for liquefied natural gas in this area is increasing at 20% per year according to some estimates, as Japan switches to gas power for its energy needs and emerging economies seek out relatively inexpensive natural gas sources to fuel increasing energy demand.
This puts Chevron in an enviable position, as it has not one but two massive liquid natural gas projects in the works in Australia. Energy demand is growing more moderately in Australia, but from the western shores of the Australian continent Chevron will be able to export liquid natural gas to the markets with the highest price realizations on the globe, driving revenues and growth.
Maneuvering with Gorgon and Wheatstone
Chevron recently announced a deal with Shell Development (Australia), a subsidiary of Shell, in which it is exchanging several of its East and West Browse working interests for Shell’s working interests in two fields in the Carnarvon Basin, plus a $450 million cash payment from Shell. Chevron will keep three of its leases in the Browse; WA-274-P, WA-281-P, and WA-410-P.
The assets acquired in the Carnarvon Basin will grow Chevron’s asset base for its massive Wheatstone Project. Together with its recent Pontus-1 natural gas discovery in the Carnarvon this could possibly enable the addition of a third train to its existing two production units at Wheatstone, with which it shares interests with Apache (APA), among others.
With Chevron’s 17.6 tcf of proven and probable reserves plus an additional 22.4 tcf in certified possible reserves in the Gorgon field, Chevron is emerging as a front runner in the Asia Pacific liquid natural gas market. First production at Gorgon is expected in 2014, while first production at Wheatstone is expected in 2016. This will allow Chevron to make first exports ahead of competitors such as the Santos GLNG Project, a joint venture between Santos, Petronas, Total (TOT), and Kogas, for which first production is anticipated in 2015.
This also places Chevron ahead of Shell. Shell is taking a risk by purchasing the Browse interests. Led by Woodside Petroleum, the Browse Project is located far offshore with high carbon dioxide content production, posing technical and logistical challenges. It also has lower reserves than other area mega projects, at 15.5 tcf of dry natural gas and 417 mbbl condensate. A final investment decision by the partners on the project is not expected until 2013, indicating first production is not likely before 2017 without an accelerated and costly building schedule.
In the Short Term, Richmond Refinery Will Hurt 3Q 2012
The refinery fire at Chevron’s Richmond refinery unit is impacting regional U.S. oil prices, even as the picture grows worse for Chevron’s output from the facility. Recent estimates are that at least sections of the refinery will need to be replaced or extensively repaired. Until a thorough inspection is made, Chevron is showing itself reticent to release a timeline to normalized operations, though a similar fire at BP’s (NYSE: BP) Cherry Point refinery in Washington state led to a three month shut down at that facility.
The Richmond refinery has a 245,000 barrel per day capacity, representing almost 10% of the West Coast’s total refining capacity. This is bad news for Chevron, since amid a middling second quarter earnings report the one stand out for the company was enormous profits from its refining units. Chevron’s U.S. marketing and refining segments saw profits increase by 70% in the second quarter over the quarter a year ago despite essentially flat product sales, driven in large part by favorable price differentials from its West Coast operations. Its international downstream operations were meager by comparison, reporting a 44% increase, though this accounts for a $22 million negative impact due to foreign currency fluctuations.
The loss of output from the Richmond refinery could prevent Chevron from a repeat earnings coup in the third quarter, since so much of its second quarter profit was dependent on earnings from this segment. As seems likely, this refinery being taken out of service for most of the third quarter will lead to a steep earnings drop for Chevron.
Outlook
Chevron is spending incrementally more on capital and exploratory outlay, reporting expenditures of $14.2 billion for the first six months of this year compared to $13.4 billion in the same period a year ago. Among its immediate peers, only Exxon Mobil (NYSE: XOM) can claim to be outspending Chevron, as Exxon Mobil spent a record $18.2 billion in the first half of this year, amid a commitment to spend $37 billion a year for the next five years to secure Exxon Mobil’s position as one of the world’s leading energy suppliers. Independent Anadarko Petroleum (NYSE: APC) looks all the more successful compared to these behemoths, considering its six month capital expenditures to date amount to a mere $1.8 billion, despite its multiple headline discoveries in the same period.
Chevron is currently trading around $113 per share, with a price to book of 1.7 and a forward price to earnings of 8.2. Shell is trading around $71 per share, with a price to book of 1.3 and a forward price to earnings of 10.9. BP is trading at a discount, around $43 per share with a price to book of 1.2 and a forward price to earnings of 16.1. Exxon Mobil is costly, trading around $88 with a price to book of 2.5 and a forward price to earnings of 9.9. Anadarko is trading around $70 with a price to book of 1.7 and a forward price to earnings of 16.1.
Chevron bears consideration, poised as it is for massive growth with liquid natural gas. It is also taking less of a hit over domestic natural gas than peers like Exxon Mobil, which is struggling under the weight of production that in some areas costs more than it can expect to realize at market. Overall, though the Richmond refinery fire poses a short term concern that will undoubtedly impact third quarter earnings, Chevron is a good buy in today’s market.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
