Chevrons story all about production

5/19/2008


Investors have anxiously awaited a breakout in Chevron’s ($98; NYSE: CVX) oil production, and the company looks set to deliver in 2008. On the heels of just two production startups in 2007, Chevron plans eight this year. At peak production, Chevron’s share of these fields should produce a combined 323,000 barrels of oil equivalent per day. That represents a 12% increase to Chevron’s March-quarter production rate of 2.6 million barrels per day. Chevron expects to produce roughly 3 million barrels per day by 2010.

Chevron’s production growth has lagged that of its peers in recent years. The 2008 lineup should provide a much-needed boost, though it often takes a year or more to ramp up to full production. While the 2008 projects are not likely to substantially boost earnings until 2009, success in getting the projects started could provide a catalyst to the stock in the short term. From 2009 through 2013, Chevron expects to start drilling at fields with a combined peak production of more than 550,000 barrels of oil equivalent per day. This steady stream of new projects should generate enough production growth to offset declines at the company’s mature fields. Chevron is a Buy and a Long-Term Buy.

It comes back to crude
Chevron’s energy portfolio is positioned to make the most of the current high price of crude oil and natural gas liquids. The company holds more oil and gas liquids as a percentage of its reserves than any other U.S. oil major. In addition, Chevron has less exposure to the shrinking profit margins of the U.S. refining industry than many other oil companies, as well as high exposure to Asia’s new gas-guzzling economies.

Like other oil companies, Chevron has seen robust earnings growth over the last four years largely because of high prices for oil and natural gas. Chevron’s profits rose to record levels in each of the last four years on the strength of vigorous growth in exploration-and-production income, despite weak production trends.

Profit margins at the downstream businesses (refining and marketing) have shriveled. In the March quarter, profits from U.S. refining-and-marketing operations fell to $4 million from $350 million in the year-earlier period. Foreign refining-and-marketing profits fell 56% in the quarter excluding gains in the 2007 period, but income of $248 million in the segment included $111 million in currency benefits.

In the March quarter, downstream operations accounted for less than 5% of Chevron’s income. In contrast, those businesses generated 19% of sector earnings in 2007, 24% in 2004, and 43% in 1998.

Oil should support stock
Consensus estimates project a gradual decline in per-barrel oil prices over the next three years from the current $124 to about $81 in 2010, and no analyst expects the price to fall below $55 per barrel. The futures market is more optimistic, with spot prices expected to remain above $115 per barrel through 2010.

Against a backdrop of record-high oil prices and expectations that prices will remain far above historical norms, Chevron looks cheap. The shares, up 5% so far this year, trade at nine times expected 2008 earnings, versus an average of 10 for the largest oil majors. An annual report for Chevron Corp. is available at 6001 Bollinger Canyon Road, San Ramon, CA, 94583;
(925) 842-1000; www.chevron.com.


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