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Chevron Buys Lithuanian Stake

Zacks Equity Research

Energy major Chevron Corp. (CVX) has purchased 50% interest in Lithuanian oil and gas exploration company, LL Investicijos. Details pertaining to the agreement were not disclosed by the company.

According to Chevron, it will begin exploration work in the coming months. The company believes that there is a significant accumulation of extractable shale gas in a belt that stretches from the Baltic countries to the Mediterranean.

Currently, Lithuania is fully dependent on Russia for natural gas supply and is also involved in a clash with Gazprom (Russia’s oil giant) over pricing. However, in order to gain energy independence, the country is trying to extend its local resources.

We see Chevron’s stake buy in Lithuania as a clear sign of its increasing interest in European unconventional natural gas. Chevron has already purchased about 4 million acres of exploration acreage in Poland and Romania. The company is also looking at a production-sharing agreement with Ukraine. Chevron has already drilled two wells in Poland and plans to start work on another.

It is expected that Chevron will increase its stake in Lithuania in the coming years.

San Ramon, California-based Chevron displays a strong portfolio of global projects, targeting volume growth of around 20% by 2017. Additionally, Chevron possesses one of the healthiest balance sheets among its peers – which include BP plc (BP), ExxonMobil Corp. (XOM) and Royal Dutch Shell plc (RDS.A) – that helps it to capitalize on investment opportunities with the option to make strategic acquisitions.

Management made significant progress in re-balancing Chevron’s asset portfolio by divesting non-core and high-cost assets. The company’s decision to sell its marketing businesses in Kenya, Nigeria, Uganda, Western Africa and Brazil is part of that strategy. In particular, Chevron plans to exit the low profit generating business and concentrate on the discovery of oil and gas worldwide.

However, Chevron’s production growth profile depends on the timely development of upstream projects, almost all of which have inherent risk factors. Time and cost overruns on these programs may lead to lower returns going forward.

As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation, supported by a Zacks #3 Rank (short-term Hold rating).

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