Why Chevron’s capital projects are crucial for production growth

Market Realist

Why do Chevron’s capex projects determine production growth? (Part 3 of 4)

(Continued from Part 2)

Major capital projects

Chevron expects to invest $40 billion on capex this year, of which, 90% will be spent on its upstream business and the remainder on its downstream business. This was the case in 2013 as well when Chevron invested $41.9 billion and expects to spend approximately the same amount through 2016. Majority of the amount would be invested in Australia, Asia, and North America, while the remainder will go toward projects in Europe and Latin America. Countries it would be focusing on this year include Australia, the U.S. Gulf of Mexico, Kazakhstan, and Angola.

Over the next five years, 50 projects of more than $250 million each are scheduled to begin and 16 of those will have an investment exceeding $1 billion. While Chevron noted that capital expenditures, which totaled $41.9 billion in 2013, have peaked, they are not expected to come down in the near term. As mentioned above, the company foresees flattening investments at a rate of about $40 billion through 2016.

Clearly, Chevron has a huge pipeline of massive investments, stated to increase production by 27%, to 3.3 MBOE/D (million barrels of oil equivalent per day) by 2017. CVX divides its growth projects into three segments — Deepwater-focused growth projects, LNG-focused growth projects in Australia, and shale resources focused growth projects in the Permian Basin in the U.S. and the Vaca Muerta Shale in Argentina.

The Deepwater-focused projects include the Jack/St.Malo project, which is scheduled to start in 4Q14, as well as the Big Foot oil export pipeline, which is stated to begin by mid-2015.

The LNG segment has two major projects both in Australia —t he Gorgon project, which is about 80% complete and the Wheatstone project, which is about 33% complete. Both the Gorgon and the Wheatstone projects combined, have a capacity of 400,000 MBOE/D and are critical to Chevron’s future growth plans. They driving on the back of massive amounts of capex of approximately $54 billion and $29 billion, respectively.

Chevron is also progressing on its shale resources development. It has drilled over 120 wells in the Permian in the year so far and is also expanding exploration acreage in the Vaca Muerta Shale in Argentina.

In the earnings report, CVX stated, “We continue to advance our key development projects…. and we are anticipating production growth in 2015 and beyond as a result of these investments. Significant progress has been made on the construction of our Gorgon and Wheatstone projects in Australia. Our Jack/St. Malo and Big Foot projects in the Gulf of Mexico are also progressing, with first production planned for late 2014 and mid-2015, respectively.”

Most of these projects are stated to begin production by the end of 2014, the anticipated growth as a result is critical to Chevron’s balance sheet. Chevron is anticipating 20% production growth, by 2017 which implies a production increase of 3.1 million barrels of oil-equivalent. This could easily translate into earnings of $25 billion to $30 billion by 2017. So, a lot depends on these projects coming online and contributing to production growth.

Chevron is a part of the Energy Select Sector SPDR Fund (XLE), Vanguard Energy ETF (VDE), SPDR S&P Oil & Gas Exploration & Production ETF (XOP), and iShares U.S. Energy ETF (IYE).

Chevron’s business is largely dependent on crude oil prices. Read the following part of the series to know how crude prices impact its earnings.

Continue to Part 4

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