Chevron guts spending by most since ’03 as profit takes dive
JOE CARROLL
SAN RAMON, California (Bloomberg) -- Chevron Corp. slashed its drilling budget by the most in 12 years and said it may delay some shale projects as energy producers around the world hoard cash and curtail ambitions in response to free-falling oil prices.
Chevron is targeting $35 billion in capital projects this year, down 13% from $40.3 billion in 2014, the San Ramon, California-based company said in a statement Friday. It was the largest reduction in its annual spending plan since 2003, when expenditures plunged 26% and crude prices were half their current levels.
Still, other producers have cut more, with some oil companies announcing spending reductions of more than 50% in recent weeks.
“Chevron doesn’t have quite the flexibility of some other companies to cut spending in the near term because they are still finishing some mega-projects,” said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis. “Beyond 2015, their flexibility will improve.”
The retrenchment by the second-largest U.S. energy producer followed Chevron’s weakest quarterly profit performance since the global financial crisis half a decade ago. Net income in the final three months of 2014 dropped to $3.47 billion, or $1.85 a share, from $4.93 billion, or $2.57, a year earlier, according to a company statement. The per-share result was 21 cents higher than the average of 20 analysts’ estimates compiled by Bloomberg.
Looking Ahead
Chevron fell 0.8% to $102.16 at 9:46 a.m. in New York. Before today, the shares had declined 11% in the past year.
Chairman and CEO John Watson said in an interview last autumn that he’ll look beyond current price declines when assessing the profit potential of future energy projects.
Despite the steep fall in prices, “we believe long-term market fundamentals remain attractive,” Watson said in Friday’s statement. He said the company would seek to reduce its expenses “throughout our supply chain.”
The vast majority of Chevron’s spending this year will be to support ongoing production, including decades-old fields in California and Texas, and projects under construction, such as its Gorgon natural gas project in Australia. Chevron said that spending will account for $26 billion of the planned $35 billion budget, with $3 billion aimed at exploration.
Market Testing
All projects will be tested against current market conditions, particularly shale assets, with Chevron “selecting only the most attractive opportunities to move forward,” Watson said.
Chevron has expanded investments in deep-sea oil fields as crude prices fell almost 60% since June.
In December, Chevron inaugurated production from the Jack/St. Malo deep-sea development in the Gulf of Mexico, a $7.5 billion venture that is expected to pump oil and natural gas for four decades. Earlier this week, the company agreed to take control and buy stakes in two Gulf discoveries and a nearby exploration prospect from BP Plc for an undisclosed price.
Watson has said he wants to boost Chevron’s worldwide output by more than 20% by the end of 2017. The company has slated about $150 billion in new oil and gas installations both on land and at sea to meet that goal.
Tougher Goal
That goal could be harder to reach with spending constrained by the market crash.
“I’m assuming their production doesn’t grow this year,” Youngberg said. “The growth outlook will need to be scaled back.”
Brent crude, the benchmark for most of the world’s oil, fell 30% to an average of $77.07/bbl during the final three months of 2014. The year-earlier average was $109.35.
U.S. natural gas averaged $3.83 per million British thermal units during the quarter, little changed from the $3.85 average of the year-earlier period.
