Will Chevron Leap on New African Exploration?
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The people of Sierra Leone have endured decades of poverty, colonization and civil wars to reach the stage they are in today. Until now, Sierra Leone was a patch of land in a forlorn corner of the world where people were murdered over diamonds, made famous by the movie Blood Diamond, starring Leonardo DiCaprio. However, the country is changing rapidly thanks to foreign investment directed toward oil exploration and drilling. Many foreign companies have expressed their interest in investing in Sierra Leona and if things continue as they are today, this tiny West African nation may give Mozambique, Angola, and Nigeria a run for their money.
Chevron (NYSE: CVX) recently announced that it will begin exploring at SL-08A and SL-08B, two deepwater blocks off the coast of Freetown. The total area of the designated fields amount to 2,100 square miles. Chevron has chosen to partner with Noble, which will hold a 30% stake in the arrangement, while Odye will keep 15%. Chevron will still be the major player, with a stake of 55%. Most analysts believe that it is too early to conclude that Sierra Leona has commercially valuable amounts of oil and that the situation may necessarily not be rosy.
Regulations and complex laws may make it difficult for companies like Chevron, which have expressed tremendous interest in Sierra Leone's oil resources. Another worry is that of militancy and religious extremism, whose existence most Sierra Leoneans dismiss. Finally, there may actually not be as much oil and natural gas as the foreign companies believe there is. This may lead to disappointing financial results after a few months. However, the executives at Chevron seem to have done their homework and they maintain that investing, exploring, and drilling in Sierra Leone is crucial for the company's future. After all, success in Sierra Leone can lead Chevron towards other countries in the vicinity, including Guinea Bissau and Congo.
In fact, Chevron sees this as an opportunity to establish itself as a major player in Africa. Africa has long been dominated by companies like Anadarko Petroleum (NYSE: APC), Exxon Mobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-A), which have all been operating in Nigeria, Angola, and Mozambique. Exxon Mobil has a well established presence in Nigeria and elsewhere in Africa. Exxon also has a significant presence in Egypt, where it has faced problems because of Arab Spring and recent protests after Mr. Morsi was elected.
Shell has an important presence in Nigeria and South Africa. Shell's presence in Nigeria has been marred by oil leaks, spills and damages to its own infrastructure. The Nigerian government views these spills as a consequence of Shell's lack of security measures. In South Africa, Shell has continued to explore and drill, establishing a strong presence.
Anadarko needs no introduction when it comes to Mozambique, where the company has singlehandedly worked towards developing the country's infrastructure. Its goodwill measures and superior drilling techniques have helped Anadarko to reign supreme in Mozambique.
We must remember that Chevron maintains one of the healthiest balance sheets of all oil companies at the moment, and a step like this will only boost investor confidence. By venturing into Sierra Leona, Chevron will be able to capitalize on many opportunities that may open up. Earlier in August, Chevron had announced that it will develop the Lianzi field in Congo. If Chevron establishes itself in Sierra Leone and Congo, it can exploit Atlantic resources that have long been the preserve of companies like Exxon, Shell and Total.
Also, Chevron has not been very adventurous in recent months and has only sought to consolidate its position in the U.S., Middle East and elsewhere. The company has also had to pay a lot of money as fines in Brazil because of environmental damages. With these situations in mind, investing in Sierra Leona really is a great step towards progress. Chevron will need to add more oil and gas profiles to its list of locations if it wants to compete with other oil corporations.
Chevron trades at $113, which is one of the highest prices for any gas corporation. With a market cap of $221 billion and an enterprise value of $209 billion, Chevron is one of the most valuable companies in the world. It has a profit margin of 11.55% and an operating margin of 16.47%, which are very assuring for investors. With a return on assets of 11.27%, one can say that the company's management is very effective.
Chevron had a revenue of $230 billion and a gross profit of $82 billion. With a total cash of $21 billion and a total debt of $10 billion, Chevron is in a very strong position fundamentally. Moreover, the company has a lot of money in hand. Its operating cash flow is $39 billion and its levered free cash flow is $11 billion. These numbers are enough to assure investors who are looking to purchase shares in the oil company.
To conclude, investing in Sierra Leone is a very wise decision that will ensure Chevron tactical advantage in expanding across Africa. It will also allow Chevron access to the Atlantic Ocean and tap resources that are still waiting to be explored. Most importantly, Chevron does not have competition in Sierra Leone or Congo, and now is the right time for the company to make the plunge.
Considering these facts, Chevron stands to gain both in the short and long-term vis-à-vis its competitors. Chevron's management can look forward to another stable source of revenue and income in the future. It is only a matter of time before Chevron becomes one of the major players in Africa.
StockCroc1 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.