Chevron (CVX), a leader in the oil and refinery business, recorded a decline in production recently, mainly due to weakness in the refining market. The margins in the refining business may remain under pressure as we see a surge in American oil production, which has driven oil prices to a four-month low recently. This will also influence the price of refined products like gasoline and diesel.
Domestic shale oil & gas revolution
U.S. oil production has been declining for the past four decades. But, it has spiked over the last few years and this is primarily as a result of shale oil and new drilling techniques. As per the U.S Energy Information Administration, 29% of U.S. oil production is from shale oil.
The U.S. has been witnessing a boom in shale oil and gas. Despite this boom, major companies like Exxon and Chevron could not reap associated benefits. Smaller companies like Continental Resources, Pioneer Natural Resources, and Apache are taking more advantage of the boom in shale oil drilling as compared to larger companies like Chevron, Exxon and Shell. Pioneer has appreciated 70% this year while Continental has gained 50%. In comparison, Exxon and Chevron have underperformed.
Chevron’s production still hovers at about 2.6 million barrels. The company is investing in shale oil and LNG projects to boost production. Chevron claims to have overrun its expenditure target by 10% and this could lead to lower earnings.
If we compare other big players like Exxon, we notice that both companies are incurring huge expenses. Chevron’s expenses reached $10.6 billion last quarter as compared to $10.5 billion for Exxon. But Exxon’s production (4.2 million barrels per day) is considerably higher than Chevron.
Chevron has been focusing more on overseas shale oil and gas projects. Despite the boom in shale oil in the U.S. it has not shown much interest in U.S. shale oil projects. The company has shown immense curiosity in countries like Argentina, Ukraine, Romania, and a few countries in Europe.
Chevron bagged a deal worth $10 billion in Ukraine for the Nadra Oleska shale gas project. The deal is mainly based on production sharing in Oleska fields, spread around 1.6 million acres of land located in western Ukraine. Both Nadra Oleska and Chevron will receive equal share in the current deal.
Argentina is another country where Chevron is establishing its foothold. It has signed a deal worth $1.24 billion with YPF. This project is to be executed in a phased manner wherein the first phase involves drilling of around 100 wells until 2014. In the second phase, over 1,500 wells are to be drilled and production is expected to be raised to 50,000 barrels of oil per day and 3 million cubic meters of natural gas per day. This deal also entitles Chevron to export 20% of its production to various countries without paying export taxes.
Chevron is also investing in LNG projects in Australia. Gorgon natural gas is a $49 billion project of Chevron in Australia. The project comprises construction of a plant with a production capacity of 15.6 MPTA (million tons per annum) and a domestic gas plant producing 300 terajoules per day.
The main objective of this project is to meet Asian demand. Chevron also has expansion plans for the Gorgon gas project going forward. The delivery of the first consignment is anticipated in the first quarter of 2015 after the successful commissioning of the LNG plant towards the end of 2014.
Chevron’s trailing P/E is 11.3, while the forward P/E is 11.64. A higher forward P/E means that earnings are expected to grow at a slower pace, and this is indeed the case, making it a stock to stay away from.