How Much Damage Did Low Prices Do to Chevron's Balance Sheet in 2015?

By Christopher

Image source: Chevron corporate website

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The oil producers generally viewed as most susceptible to the oil-price collapse are the pure-play shale producers. These companies have young shale production with very high decline rates. Without continued capital spending, these shale producers are going to suffer from declining production.

That puts the shale producers in a real pickle, since they need cash flow from that production to support debt payments.

The strongest producers are the majors such as Chevron , companies with mature low-decline conventional productionand strong balance sheets. These companies can maintain production levels while spending considerably less. The majors are far better equipped to manage through a "lower for longer" scenario. The majors have decent sized and growing shale positions, but the vast majority of their production relates to mature conventional assets.

While the majors are advantaged, they are certainly not immune from the effects of low oil prices. A quick look at Chevron's cash flows in 2015 makes that very clear.

This was what Chevron looked like with 2015's oil pricesDid Chevron live within cash flow during 2015? It certainly didn't, and it wasn't even close.

The company generated $19.5 billion of cash flow from operations. Against that $19.5 billion of cash coming in, $38.6 billion went out the door for capital expenditures and dividends.

The following table breaks the numbers down in billions.




Cash from operations



Capital expenditures



Dividends paid



Share repurchases



Net cash outlay



Source: Chevron.

Add the numbers up, and we're talking about a $19.1 billion cash shortfall. That's a huge number even for Chevron.

The most obvious question you should have at this point is how the shortfall was funded. The answer is that it came from three sources:

1. A decrease in Chevron's cash and working capital of $2.6 billion.2. An increase in long-term debt of $10.8 billion, from $27.8 billion to $38.6 billion.3. Asset sales of $5.7 billion.

Source: Chevron's Q4 2015 earnings presentation.

Basically, Chevron spent its cash, borrowed from the bank, and sold off some of its possessions to outspend cash inflows by $19.1 billion. That is not a sustainable strategy.

The payoff for significantly outspending cash flow, deteriorating the strength of its balance sheet, and selling assets was that Chevron managed to maintain its dividend and keep its production basically flat.

If Chevron had been forced to live within cash flow, the entire dividend could have been eliminated and significant capital spending cuts required.

Without the integrated business model, things would have been worseChevron and the other major producers that have been around for decades have an advantage over the shale operators because of their mature production. They also have another key advantage because of their integrated operations.

In 2015, those downstream operations provided a big boost to Chevron's cash flows.

Operating profits for Chevron's downstream operations were $7.6 billion in 2015. The downstream operations actually did significantly better in 2015 than 2014. The Q4 earnings release doesn't break out cash flow by business segment but clearly with $7.6 billion in earnings downstream will have made a significant cash flow contribution.

Source: Chevron's Q4 2015 earnings report.

Without this downstream diversification, Chevron would have recorded a significant operating loss in 2015.

Last year was tough for Chevron. This year looks to be even more difficult. Oil prices averaged $52 per barrel in 2015, and we're now looking at prices that are bouncing around $30.

If these oil prices persist, there are going to be hard decisions for Chevron. Its dividend will be part of those decisions. If Chevron completely eliminated its dividend in 2015, it would still have outspent cash flow by $11 billion. That was with considerably higher oil prices.

One thing Chevron already did was stop buying back shares. In 2014, Chevron repurchased $4.4 billion of stock. Last year it didn't spend a dime.

That seems to be pretty common practice in this industry. When oil prices are high and cash flows are strong, the majors buy back a lot of shares. One has to wonder if they wouldn't be much better off leaving that cash in the bank and waiting for an inevitable drop in oil prices when they could buy back those shares at much lower prices.

It does make sense that the share repurchases are reduced before capital spending is. The nature of the big oil companies is that they have multi-billion dollar, long lead time projects that can't be stopped mid-development. Where a shale producer can cut back spending almost instantly, a large deepwater project needs to be taken to completion. In 2015 Chevron had both the Gorgon project and Wheatstone LNG in process. Once those projects come on-line they go from being cash consumers to reliable cash generators.

Implications for investorsIf you think $50 oil is here to stay for the long term, you have no business owning oil producers. Even the majors such as Chevron incurred significant financial pain in 2015. Today the price of oil is even worse.

The reality is that the current oil price doesn't work for anyone producing oil anywhere. Not the shale producers that require higher prices for their wells to be economic. Not the majors that are also bleeding cash. And not the low-cost Middle East countries that have massive annual budget deficits at anything close to current oil prices.

It seems almost certain that oil prices have to head higher. The trickier part is figuring out when that happens. Chevron may not offer as much torque to an oil rebound as a beaten down shale producer might, but it is almost certain to be able to outlast a very long bottom of the cycle.

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