Exploration In Morocco - Worth The Risks For This Major?
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When Chevron (NYSE: CVX) reported its third quarter earnings in November 2012, it had dropped by almost 33%. In order to offset its recent declines, Chevron has begun to expand its frontiers across the world. One such place is Morocco. In this article, I will discuss why Chevron's decision to explore in Morocco was good for the company’s profitability, despite the increased security threats in Northwest Africa.
The Deal between Chevron and The Moroccan Government
Chevron's latest deal with the Moroccan government will give the company a stake of 75% in three concession areas. The sites cover an area of almost 11,300 square miles and are located off the coast of Morocco. Offshore oil fields always come with less security related risks than onshore fields. Morocco’s Offices National Des Hydrocarbures Et Des Mines and Chevron have signed agreements in order to take the decision further. 25% of the stake will be held by the Moroccan government. The three offshore fields where Chevron will begin to explore and drill are Cap Rhir Deep, Cap Cantin Deep and Cap Walidia Deep. All the locations are between 60 and 120 miles west and northwest of Agadir, Morocco.
Offshore Oilfields Are Safer than Onshore Fields
It may seem like a drastic move, especially in the wake of terrorist attacks against the British Petroleum (NYSE: BP) facility in Algeria that killed more than 81 people, including hostages and terrorists. However, Chevron is really bullish on this particular deal. As the deal is offshore, there will be no security risks from territorial terrorists. Piracy in Moroccan coast is unknown and is thus a safe place to begin to explore and drill. Ali Moshiri, the president of Chevron Africa said Chevron will be able to expand and further its operations thanks to the new deal. He said "This is an opportunity for Chevron to expand its already strong presence in the region and allows us to acquire further knowledge about promising geology in an emerging area."
Chevron’s Competition in Morocco and Algeria
BP suffered a major blow when Islamists took over its In Amenas facility in Algeria. The resulting fatalities cast a spell of doom but the company has maintained its poise. Bob Dudley, chief executive of BP, said that the company is closely monitoring security situation in Algeria. BP has not made any more details regarding the attack public, considering the sensitive nature of the incident.
Meanwhile, ExxonMobil (NYSE: XOM) is being lured by Algeria back in November to explore and drill in some of the Saharan fields. These fields extend to Morocco as well, but Exxon has not made any statements about its plans to invest or explore in Moroccan fields. However, Exxon remains committed to exploring in Algeria, Morocco’s neighbor.
Vitol and Helios had acquired a majority of Royal Dutch Shell's (NYSE: RDS-A) stake in its downstream business in Morocco back in 2011. Now, the entity is known as Vivo Energy Maroc and is the remnants of the original Société Shell du Maroc. Shell divested its Moroccan properties in order to invest elsewhere in the world, especially in Nigeria.
Anadarko Petroleum (NYSE: APC), which does not have an active exploratory role in Morocco at the moment, reached an amicable agreement with Algeria's Sonatrach. The agreement was signed in March 2012 and fetched $4.4 billion to the Texan company. Anadarko's role in Morocco or its neighbor remains the subject of much speculation.
Chevron has a market cap of $227 billion and an enterprise value of $218 billion. With a price to sales ratio of 1.01 and a price to book ratio of 1.71, Chevron looks impressive. It can certainly do better than what it is doing now, and by choosing to explore and expand its frontiers beyond conventional oil fields, it will increase its profit margin in the long-term.
Chevron's profit margin is 10.70% and its operating margin is 15.72%, which suggests the company is one of the best energy companies to invest in at the moment. Chevron's management has been effective. With return on assets of 10.25% and return on equity of 18.91%, Chevron proves to be a safe bet for long-term investments. The company has a cash flow of $35 billion and will be able to handle the operational costs of exploring and drilling in Morocco. Moreover, the current projects in Morocco do not have the security risks associated with onshore Saharan projects. All these factors suggest that Chevron’s profitability will increase over the next few years, making it an attractive investment option.
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