Chevron (CVX): 'Classic value investment'

by Elliott Gue, editor The Energy Strategist

Big Oils are a classic value investment proposition at current prices; now is the time to go shopping.

And Chevron (CVX) is the only Big Oil name that’s likely to grow production significantly in coming years thanks to a long list of projects underway.

Investors often regard Big Oils as mysterious profit-generators because of all their moving parts, but they’re fairly simple companies.

Most of the integrated oil companies amount to a combination of upstream and downstream operations. Upstream activities include the exploration for and production of crude oil and natural gas; downstream operations focus on refining and marketing.

Chevron is the “oiliest” of the group, generating nearly 70 percent of its production from oil.

Another big plus: Much of Chevron’s reserve additions have come through the drill bit rather than the pen tip, a testament to the quality of the firm’s global exploration program.

In 2009 the company’s existing production base declined by 130,000 barrels per day, but a series of major international projects offset these losses and expanded production by 305,000 barrels per day.

Here’s a look at some of Chevron’s major projects that recently entered production or will begin producing in a few years.

Agbami – This project offshore Nigeria began producing in 2009 and achieved peak production of 250,000 barrels per year by August.

Tengiz – Chevron is developing this field with Kazakhstan’s national oil company. Production from the play has ramped up to 250,000 barrels per day, and Chevron is making efforts to boost production further.

Blind Faith – A huge offshore platform moored in the deepwater Gulf of Mexico, Blind Faith collects production from wells located in about 7,000 feet of water. The development saw peak production of about 70,000 barrels per year in March 2009.

Because Blind Faith has gathered oil from existing wells for more than a year, Obama administration’s drilling moratorium won’t affect it; companies are permitted to do basic maintenance on wells when needed.

Tahiti is another deepwater development located in the Gulf of Mexico. At more than five miles in total depth, it has the distinction of being the deepest producing well in the Gulf.

Tahiti produced 135,000 barrels of oil equivalent per day in July 2009, 125,000 barrels of oil and 70 million cubic feet of natural gas. Again, as a producing field, Tahiti shouldn’t be impacted by the Gulf moratorium.

Tombua-Landana, located in 1,200 feet of water off the coast of Angola, is another big deepwater field. The play achieved first oil in 2009, and Chevron expects a peak production rate of 100,000 barrels of oil per day in 2011.

Chevron has a 51.74 percent stake in the Frade deepwater project located in 3,700 feet of water 230 miles offshore Brazil. Production commenced in 2009 and is expected to peak in 2011 at around 72,000 barrels per day.

Looking a bit further into the future, Chevron has several new projects slated to enter production over the next few years. The list includes expansions to the Agbami field and Tengiz project as well as a series of large-scale LNG projects in Australia that should benefit from growing Asian demand for the commodity.

Chevron also has a long list of deepwater projects offshore Africa and Brazil and in the Gulf of Mexico. Although some of the Gulf plays may be delayed by the moratorium, they do offer longer-term upside, and Chevron has the financial power to handle any new safety regulations.

All told, Chevron expects to boost its production at an annualized rate of 1 percent through the end of 2014. After 2014, management forecasts production growth of 4 to 5 percent per year as a number of major projects come online.

Chevron’s downstream business has been a drag for some time. However, management has indicated company that margins are improving. Over the long term, layoffs and other cost-cutting measures should boost profitability. And Chevron’s significant refining footprint in California is a major positive given the superior margins in that market.

Despite its superior growth prospects, Chevron is among the cheapest Big Oils. Buy Chevron up to 85.

Learn more about this financial newsletter at Elliott Gue's The Energy Strategist.