With daily headlines out of the Middle East about a limit on production it makes the early June OPEC meeting even more important. If they can limit production in the coming weeks that could provide a common ground to cut production in June.
CVX - Chevron Corp - Company Profile
Chevron Corp explores, produces and refines oil and gas on a global scale. The upstream division explores and produces oil and gas. The downstream division refines the oil, produces petrochemicals and liquefies and distributes LNG around the world. Chevron is the real deal with operations in every facet of oil and gas production and distribution.
Despite the low oil prices Chevron continues to announce the completion of multiple projects to significantly enhance ongoing production. Currently Chevron produces about 2.54 million Boepd globally. They have a global refining capacity of 1.9 mbpd where profits offset the decline in crude prices. In Q3 Chevron had net income of about $2 billion. They generated cash from operations of $5.4 billion and paid out $2 billion in dividends.
The company has announced a decrease in capital expenditures from $42 billion in 2013 to $25 billion in 2016 and as low as $20 billion in 2017 depending on the market. This was helped by most of the work being completed on their two LNG facilities in Australia at a cost of nearly $60 billion. These facilities are preparing for first LNG and will be a source of a huge production increase for Chevron over the next three years.
On January 27th Chevron announced a $1.07 dividend for Q1 and they are confident cash flow will cover dividends through 2017. The CEO said maintaining the dividend will be their top priority in a period of low oil prices. Their current yield is about 5.1%.
The company announced on January 26th, first gas at the Chuandongbei Project in Southwest China. The project covers more than 800 square kilometers and is thought to contain more than 3 trillion cubic feet of gas. The LNG project consists of three trains that can process 258 million cubic feet of gas per day. The first train is now in operation and the other two trains are under construction and nearing completion. Chevron owns 49% of the project and China National Petroleum owns 51%.
In December they announced first oil from the Moho Bilondo development offshore the Republic of Congo. The project is 50 miles offshore in 4,000 feet of water. The initial project has 11 wells that are expected to produce 40,000 bpd. In November they announced first oil from the Lianzi Development Project also offshore the Republic of Congo. This project is 65 miles offshore in 3,000 feet of water and is also expected to produce 40,000 bpd.
Chevron has such strong financials that along with Exxon they were the only two companies not included in the recent Moody's warning of ratings downgrades. The rating agency said they were going to downgrade 120 oil and gas companies and 55 mining companies. Chevron and Exxon were exempted.
In the last earnings cycle for Q3 Chevron beat estimates by 37.9% and has posted an average beat of 15.11% for the last four quarters. Their refining and chemicals businesses have offset the losses from the lower oil prices. Chevron is set to announce earnings on Friday. I would not normally recommend a long position ahead of earnings but Chevron has a lot to brag about and production increased significantly in Q4. Conservative investors may want to wait until next week to enter the position.
Chevron shares have shown relative strength to the market because of their balance sheet, high production, new projects coming online and the dividend. That means we should be somewhat insulated from a price crash. Once oil prices do begin to rise for whatever reason we should see Chevron shares outpace the sector because of their relative strength.
Chevron probably has more new production in the pipeline than any other U.S. company. Most of that production is gas with two monster projects in Australia. The Gorgon project is a multibillion dollar LNG facility with the export capability of 15.6 million tons per annum (MTPA)(2.184 Bcf/d) of LNG to Asian markets. Demand for gas to Asia is expected to double by 2025. The fields feeding this LNG plant have more than 40 Tcf of gas with new discoveries every month. The first train of the three-train project is under construction and should be operational in 2015.
The $29 billion Wheatstone project will consist of two LNG trains with a combined capacity of 8.9 MTPA (1.25 Bcf/d) with the option to expand to 25 MTPA (3.5 Bcf/d). The first LNG output will be in 2016. More than 80% of the gas supplied to Wheatstone will come from Chevron fields. Another 20% will come from an Apache find in the same region. Chevron has made 21 major discoveries of gas in the region since 2009. The initial discovery was 9 Tcf of gas but more is being added every month.
There have been some worries recently about a surplus of LNG with numerous projects getting close to commencing operations. Chevron was one of the first to sanction the major projects in Australia and they presold the vast majority of their production for the next 20 years. If LNG prices do decline, Chevron will be protected. The Australian projects are close to Asia so shipping is less of an expense making their gas more desirable. With the projected startup later this year and full production by the end of 2016 this will be a monster boost to Chevron's global production.
Gorgon is the world's largest LNG project since 2010 and Australia's largest LNG project. Chevron owns 47% and Exxon and Shell own 25% each. Chevron spent $4.5 billion in 2014 and is expected to spend $3 billion in 2015 on Gorgon. Just beginning operations turns this project from a money pit into a moneymaker with revenue net to Chevron of $2.1-$2.9 billion a year.
These are just two of the dozens of projects Chevron has in progress. In the last ten years, Chevron has added 10.2 billion barrels of oil equivalent to its reserves.
The biggest factor in Chevron's favor is the pending start of the Australian LNG operations. This will significantly increase global production, reduce capex and increase cash flow. The earnings reports in 2016 will show significant improvements.
I am recommending an optional short put to offset some of the premium for the expensive LEAP calls.
Buy 2017 $90 LEAP Call, currently $7.55, no initial stop loss.
Sell short Jan $70 LEAP Put, currently $4.20, no initial stop loss
Net debit $3.35.