Jefferies hosted investor meetings last week with Chevron Corporation (NYSE:CVX) CEO John Watson. The message was consistent with that from the company’s March analyst meeting: the cash cycle is improving; capex is being tightly controlled; production growth will accelerate, driven by Australian LNG; and Permian will be a key growth contributor.
Chevron’s capital spending falls to $19.8b in 2017 versus a peak of $41.9b in 2013, as the company’s major capital projects reach completion. Spending in 2017 includes about $2b for the final phases of the Gorgon and Wheatstone projects, which will be essentially completed this year; thus the go-forward capital spend rate is about $18b/yr. The company is guiding for total capital expenditures to range between $17-22b in 2018- 2020, and Watson commented that it is unlikely the company would reach the high end of that range.
Gorgon train 3 has ramped to over 90% utilization, and the firm expects the project could be at full economic capacity by mid-year. Each of the 3 trains has operated at over 90% utilization at some point, and the upstream is now producing from the Gorgon field in addition to the Io/Jansz fields. The firm expects that once the CO2 separation and sequestration system is available for the Gorgon field the project will function at full economic capacity. Train 2 started production in October 2016 and ramped to over 90% utilization in its first weeks. The train was brought down for a 20-day maintenance program in March, after train 3 had been ramped up. Train 2 should return to production within the next few days.
At the March analyst meeting, Chevron raised its guidance range for Permian production to 325-450 kbde by 2020, with potential for 700 kbd in the middle of the next decade. The depth of Chevron’s Permian drilling inventory provides for decades of activity – which is not efficient from an NPV standpoint. The company indicated that it had identified about 150k acres that it could use as bargaining chips, and could ultimately lease or JV this acreage to other operators. Jefferies expects that the company will be active in swaps to block up its acreage to allow for longer laterals.
The firm’s $147 price target is derived from a DCF model, supported by a sum of the parts and dividend discount model analysis. It believes the key risk to its Buy thesis over the next 12 months is project execution risk, particularly at Gorgon and Wheatstone. CVX is also at risk from falling commodity prices.