Chevron's management is focused on one long-term goal right now: closing the gap between its spending habit and its ability to generate cash flow within the next couple of years. The decline in oil prices over the past year hasn't helped much, but the company wants its investors to know that it has a lot of levers it can pull to get there. Here are several comments from the company's most recent conference call that reflect how the company plans on meeting those stated goals.
1, There are some silver linings to market downturnsIn every bad situation is always a little bit of good. In the case of the oil-price drop and the fast decline in rig counts and drilling activity in the United States. Chevron and other producers have been able to renegotiate several of their contracts with equipment suppliers and service contractors, which is leading to some pretty significant cost savings. Chevron CFOPatricia E. Yarrington gave a small highlight:
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It may not be enough to completely cover up the decline in revenue from oil prices, but $1 billion in savings is a good-sized chunk of change that will certainly help, especially if those cost savings can be locked in for the longer term.
2. We're getting much more efficient at shale drillingBig-oil players such as Chevron were a little late to the game when it came to drilling shale formations in the United States, and it took some catching up to realize some of the cost savings and better well economics that its smaller competitors were getting in similar regions. While those reduced costs from new supplier contracts have certainly helped Chevron catch up, some of its gains in operations efficiency and a better understanding of extracting resources from shale have led to some surprisingly good results. Said James William Johnson, senior VP of upstream operations:
That last number is the most encouraging one. At a breakeven price of $50 per barrel, that puts Chevron on the lower end of the cost curve for shale drilling. With a lot of potential wells at that breakeven price point, it could give Chevron a decent production platform in this lower price environment.
3. Getting Gorgon and Wheatstone online will give us a ton of options for capital spendingSo much of Chevron's near-term growth is riding on the development of the Gorgon and Wheatstone LNG facilities in Australia. The capital commitments for the two facilities represent almost one-quarter of Chevron's current market capitalization. Also, since these are such large projects that are under heavy construction spending today, they're taking up a huge portion of the annual capital budget. Once both of those facilities are up and running in 2016, though, it will give the company a lot of flexibility to invest in other projects or cut total capital spending altogether. Here's Johnson describing what getting these two projects online means to the budget:
You can do a lot of different things with $7 billion. Simply cutting that much from the budget would be a more than 20% reduction in capital spending. However, as Johnson suggested, some of that capital spending could go into shorter-cycle development projects. Considering that the company mentioned it has a breakeven cost of $50 a barrel on shale wells and that those are some of the shortest-cycle development projects an oil company can invest in today, it would not be a shock to see Chevron expand its shale production post Gorgon and Wheatstone.
4. We're conserving cash where we canBack in 2013, many of the big oil players were saying they expected capital spending to peak in either that year or in 2014, and it looks like it's actually happening. Going further into the future, though, it appearsthatChevron is looking to make even deeper cuts, as Johnson explains:
This is thedilemma oil companies face today. They can put several projects on the back burner now to conserve cash over the next couple of years, but in doing so they could make growth that muchharder to come by further out. It appears that Chevron's priority is to get cash up in the near term, and there's a reason for that.
5. We're going to cover our dividend payments in 2017, no matter whatOne of the questions that arose was the ability to cover its dividend payments. During the company's analyst presentation, it said that it will fully cover capital expenditures and dividend payments with operational cash flow in 2017. However, at the time, that assumption was made with the price of Brent crude at $70 a barrel.
Source: Chevron investor presentation.
That's all well and good, but what happens if oil remains below that $70-per-barrel threshold? Here was what Yarrington had in response to that question.
So there you have it. Chevron says it still plans on achieving that goal of meeting its capital commitments by 2017, regardless of what happens to oil and gas prices between now and then. The question still remains, though: How much of its longer-term future will it have to sacrifice to make that happen?
What a Fool believesIt's hard to overstate the importance the Gorgon and Wheatstone projects have on the future of Chevron. With so much capital tied up in these projects, successful completion of them will give the company a lot of financial flexibility in the future. Management has made it apparently clear that getting these projects done and cutting costs are the two priorities right now, because doing these two things will give it the best chance of meeting its stated goals for 2017.
The article These 5 Quotes From Chevron's Management Show What You Need to Know About Its Future originally appeared on Fool.com.
Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.comor on Twitter@TylerCroweFool. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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