Chevron unveils the largest spending cut Due to Oil price slump

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Chevron unveils the largest spending cut Due to Oil price slump

Chevron unveils that largest spending cut Due to Oil price slump
Chevron is the second largest oil and gas group in the US after ExxonMobil, they have announced steep cuts in its spending on production and exploration, they have set out a plan to cut capital expenditure in 2016 by as much as 24%.
The cuts are the latest signs of how the slump in oil and gas prices since last year is forcing companies to rein back development of new reserves, subsequently reducing the supply that will be available in future years.
this was made known by the Chief executive officer John Watson as he said on CNBC television that their number one priority was to pay dividends, and that Chevron will get balanced financially in the short run by using “spending discretion” and not by cutting dividends.
Other global large international oil companies such as Shell and BP have been subject of mounting concern about their ability to maintain their dividends also other Oil and gas multinationals Eni announced a cut in March this year.
Chevron said they planned to invest $26.6Bn in 2016, this figure is down from an expected $35Bn this year.
That includes a sharp cut in its budget for exploration for new oil and gas reserves, which will drop from $3Bn this year to just $1Bn next year 2016.
At the same time Chevron is cutting its spending in the US especially on production including the shale oil and gas by about 34%, from %8.2Bn to $5.4Bn.
Most affected
The reduction includes a slowdown in spending on large developments, particularly the huge Gorgon and Wheatstone liquified natural gas projects in Australia, they are scheduled to come into production next year in the first and fourth quarters respectively.
Mr Watson said in a statement that Chevron’s priorities for investment were completing those large developments ensuring safe and reliable operations, funding high-return short-term projects and to preserving options for the longer term He added “Given the near-term price outlook, we are exercising discretion in pacing projects that have not reached final investment decision”
Though many other oil companies made cuts in their investment but that of Chevron is the steepest for such a large international group.
In 2017-18 Chevron expects capital expenditure of $20Bn-$24Bn. each year, this means that it could commit just a little more than half of the $39.8Bn it spent in 2014.
Wood Mackenzie the oil and gas consultancy reports that the effect of the fall in prices caused oil companies to cancel more than $220Bn of projects this year and the fall out reduced the expected crude oil production by 2m barrels per day.
Wood Mackenzie also warned that is oil remained below $50 a barrel a total of $1.5Trn of potential investment in the oil and gas will be at risk.

Recently Chevron released its Q3 2015 earnings report according to forbesThe company has been hit hard by the current downtrend of low crude oil prices and its average price realizations in both upstream and downstream segments have suffered as a result. However, Chevron remains confident of its short to medium term upstream production growth outlook. The company believes that it can increase average daily hydrocarbon production rate to 2.9-3.0 million barrels of oil equivalent per day by 2017 and expects key projects such as Gorgon, Wheatstone and Angola LNG to provide the majority of volume growth. Chevron is also taking measures to reduce its capital spending and overall cost structure in order to be able to better steer through this commodity trough. We believe that these measures will be beneficial in lifting the company’s cash profit margins as oil prices recover gradually in the long run.

Our price target for Chevron stands at $95, implying a premium of around 5% to the market.

Upstream Production Growth Outlook Promising, But Oil Prices Currently Hurting Segment 

Chevron remains confident of its short to medium term upstream production growth outlook, citing progress on the key projects that are expected to drive its average daily hydrocarbon production rate from around 2.6 MMBOED currently to 2.9-3.0 MMBOED by 2017. The valuation of an integrated oil and gas company’s upstream division largely depends upon new discoveries of technically and economically recoverable hydrocarbon reserves and ongoing projects that would boost the rate of hydrocarbon production. Although Chevron’s total oil equivalent hydrocarbon production rate has remained relatively flat around 2.6 million barrels per day since 2006, the short to medium term prospects of the company’s upstream division look bright. This is because the company is making some good progress on the key growth projects such as Gorgon, Wheatstone and Angola LNG. These projects are collectively expected to provide the majority of Chevron’s volume growth. The company plans to ship the first cargo form the Gorgon LNG project, which forms the centerpiece of its production ramp-up plan, in the first quarter of 2016.

Chevron’s third quarter upstream production was down marginally by around 1.1% year over year, as growth from the continuing development of shale and tight resources and the ramp-up of recently started projects was more than offset by the impact of asset sales, lower production entitlements, and normal field declines. Oil prices continue to wreak havoc on Chevron’s upstream operations in 2015. Chevron’s global liquids realizations for the year so far have amounted to $48, almost 50% lower than what the company managed in the year-ago period. Based on the current crude oil price environment, we believe that Chevron’s Average Liquids Price Realizationwill remain below $50 for the year 2015 and will subsequently rise in later years once global oil prices start experiencing a gradual recovery.

Chevron Optimizing Capital & Operational Costs In Low Oil Price Environment

Controlling expenditures, while maintaining modest growth prospects, is the highest priority for Chevron right now, primarily due to the changed crude oil price environment. In the past few years, the company’s total net capital expenditures have soared from around $19.7 billion in 2009 to almost $34.6 billion in 2014. Most of the incremental capital expenditures have gone into the development of deepwater hydrocarbon reserves and the construction of giant liquefied natural gas plants in Australia, where cost structures have elevated significantly over the past few years due to rising labor costs. The gross cost estimate for the Gorgon LNG project has risen by more than 45% since 2009, and stands at $54 billion today.
However, the decline in global crude oil prices has forced the company to increase its focus on optimizing both capital and operational costs in order to maximize its return in the current commodity down cycle. As a result, Chevron has cut down on its capital spending in 2015. Capital expenditure for the first nine months of 2015 amounted to $25.0 billion, a 13% reduction over the prior year period. Chevron plans to continue reducing its capital expenditures during the next few years and hopes to bring down the full year capex to $20-24 billion by 2018 depending on business conditions. The company is also actively seeking to divest its non-core assets. Chevron has set a divestment target of $15 billion for the 2014-17 period and has already completed $11 billion in divestments as of Q3 2015. Additionally, the company is working towards a more efficient cost structure and plans to lay off 6,000 to 7,000 employees and a similar number of contractors. Cost cutting has been a prevalent theme for all major integrated oil companies in the current scenario and we believe that such measures will be beneficial in lifting Chevron’s cash profit margins once oil prices start recovering in the long run.

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