The Next Kitimat Growth Story

Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Chevron (NYSE: CVX), the second-largest U.S. oil company, has agreed to buy a 50 percent stake in the proposed Kitimat liquefied natural gas terminal from Encana and EOG, joining the competition to ship the fuel from North America to Asian markets.

Chevron will also acquire 50 percent of a pipeline serving the Canadian project and drilling rights for 644,000 acres in British Columbia’s Horn River and Liard basins. Chevron will operate the LNG terminal and pipeline, and project partner Apache (NYSE: APA) will handle the acreage. Chevron joins the likes of Royal Dutch Shell and Malaysia’s Petroliam Nasional Bhd in establishing gas exports from western Canada to Asian markets, where the prices are far more profitable than in the North American market. The Kitimat project is 400 miles (650 kilometers) north of Vancouver. The Pacific Trail pipeline would stretch 290 miles, connecting the terminal to a pipeline system owned by Spectra Energy, and the Kitimat project has a license from Canadian regulators to export 10 million metric tons a year of the liquefied fuel.

Apache Chairman and Chief Executive Officer Steven Farris estimated in March the Kitimat project would cost $15 billion, including the terminal, pipeline, and investment in related drilling wells. The cost of building these terminals, which chill gas to -260 degrees Fahrenheit (-160 Celsius) to liquefy it for tanker shipments, has risen in recent years as competition for materials and workers has increased. Apache is still completing the design process that will help develop cost estimates and the project is at an extremely early stage, so it is difficult to provide any meaningful assessment of the impact on Chevron. All of the companies involved declined to provide terms of the deal, so we cannot even figure out what it is going to cost Chevron--though some speculation places the number at $1.3 billion. The transaction, subject to approval from Canadian regulators, is expected to close by the end of March.

North America is poised to take a leading role in the global energy market as a net exporter. The other big players in the U.S. aren’t sitting on their hands, either. Exxon Mobil is reportedly getting bullish on shale gas in Great Britain, competing with Royal Dutch Shell for the purchase of the Bowland project in Northwest England.

Financials

Chevron reported earnings of $5.3 billion ($2.69 per share - diluted) for the third quarter 2012, compared with $7.8 billion ($3.92 per share - diluted) in the same quarter of the previous year. Sales and other operating revenues in the quarter were $56 billion, compared to $61 billion year on year. Worldwide net oil-equivalent production was 2.52 million barrels per day in the third quarter of 2012, down from 2.60 million barrels per day in the 2011 third quarter.

Production increases from project ramp-ups in Thailand, Nigeria, and the United States were more than offset by the effects of planned maintenance-related downtime, normal field declines, continued shut-in of the Frade Field in Brazil, dispositions and storm-related shut-ins in the Gulf of Mexico. The company expects increased production in the fourth quarter 2012 compared to the current quarter, because of the completion of planned turnarounds and restoration of shut-in production in the Gulf of Mexico. U.S. upstream earnings of $1.12 billion in the third quarter 2012 were down $386 million from a year earlier, primarily due to lower crude oil and natural gas realizations and lower production. U.S. downstream operations earned $456 million in the third quarter 2012, compared with earnings of $704 million a year earlier. The decline was mainly due to lower margins on refined product sales and higher operating expenses.

Planned capital expenditure for 2013

In the first week of December, Chevron announced that it will spend almost $37 billion in 2013 across the world. The increased capital budget spending will be used for oil exploration and capital projects. The figure is a 12% increase from 2012 spending budget and a 70% increase since 2010. Of the $37 billion that is slated to be spent, $33 billion will be spent in exploration and production of oil and gas. Of this $33 billion, $7.5 billion will be spent in the U.S., $3.4 billion in West Africa and shale regions across the world, $2.7 billion for refining and other downstream operations and another $3.3 billion for expenditures of Chevron's affiliates. Chevron will concentrate on Gulf of Mexico projects, operations in West Africa, and the Gorgon LNG project in Australia, all of which are located in countries that are not politically unstable.

What the competition is planning

Chevron's competitors like Anadarko Petroleum (NYSE: APC), Exxon Mobil, Royal Dutch Shell and Marathon Oil (NYSE: MRO) have all raised their capital spending in order to meet demand. Exxon Mobil announced its plans to spend almost $185 billion in capital over the next five years, which works out to around $37 billion a year--about the same as Chevron. Exxon has taken a positive view of the market, which is why it is spending more than in previous years.

Anadarko, which is successful in Mozambique, has now shifted its focus to Kenya, and it is doing well in East Africa. Anadarko's capital budget for 2012 was estimated to be under $7 billion though this is much lower than the spending of both Exxon and Chevron.

Marathon has been active in Angola, Canadian oil sands, and Kurdistan, and has announced capital spending of $5.2 billion in 2013. Marathon intends to spend all that money in oil-rich unconventional fields in the U.S in oil-bearing shale formations in Bakken, North Dakota, Anadarko Woodford, Oklahoma, and Eagle Ford, South Texas. Marathon expects to boost production by 8%. Shell has a capital budget of $30 billion in 2012 and it has announced that 80% of this spending will be in upstream activities, 60% of which is to be spent in North America and Australia. The company has faced difficulties due to armed militancy in Nigeria.

Conclusion

Chevron has annual revenues of $225 billion and cash of $21 billion, with a debt of only $12 billion, which is relatively low. The cash generation from operations ($35 billion) can finance almost all of its capital spending. and the company has lots of money. The company is wisely investing in improving production. and this is bound to result in an improvement in its earnings multiples. I believe that spending and production growth will result in better share prices in the future. and I would recommend buying at the current price of around $109.


jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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