Replies to post #514 on The Rising Influence of Rising Affluence

[DewDiligence]

CVX 4Q09 Earnings: Upstream Yay, Downstream Nay

[You know the refining business is really bad when even CVX is losing money in the downstream segment—the US west coast, where CVX’s refining is focused, ordinarily has among the best refining spreads. Upstream, CVX has some big projects to look forward to (e.g. Gorgon), but 2010 won’t see much of an improvement: production guidance is 2.73 mbod, +1% vs 2009.

Despite all this (or rather *because* of it), CVX is dirt cheap: the stock trades at ~9x est 2010 EPS and ~7x est 2011 EPS and it pays a dividend yield of almost 4%. The litigation in Ecuador is not a material risk to shareholders, IMO, insofar as CVX has zero assets in Ecuador and the case has little if any chance of bearing fruit in another venue.]

http://online.wsj.com/article/SB20001424052748703389004575032933350010208.html

›JANUARY 30, 2010
By ISABEL ORDONEZ

Chevron Corp.'s fourth-quarter profit fell 37% due to losses in its refining-and-marketing business, a segment the oil company said will continue to struggle amid weak demand for fuels.

Chevron, like other oil companies with large refining operations, has taken a hit to earnings as the sluggish economy damps sales of gasoline and diesel.

"We're certainly not satisfied with our downstream results in 2009," Chevron Chief Executive John Watson said Friday in a conference call with analysts.

Mr. Watson said it is premature to talk about closing or selling refineries, like some independent fuel producers have done recently. Chevron, however, said earlier this month it plans to restructure its refining-and-retail business, including exiting some markets and cutting jobs.

"We are shifting to a simpler and less costly organization to improve returns and remain competitive in this difficult environment," Mr. Watson said. The San Ramon, Calif., company will elaborate on the restructuring plan at a meeting for Wall Street analysts in March, he said.

Chevron, the second-largest U.S. oil company by market value after Exxon Mobil Corp., posted a profit of $3.07 billion, or $1.53 a share, in the fourth quarter, down from $4.9 billion, or $2.44 a share, a year earlier. Results for the prior year included an asset-exchange gain of $600 million. Revenue increased 7.7% to $48.68 billion.

Losses of $613 million at the company's downstream business, which manufactures and distributes gasoline, diesel fuel and other refined products, overshadowed improved exploration-and-production results that benefited from higher energy output and oil prices.

Chevron increased production by 9.3% to 2.78 million barrels a day for the latest quarter and by 6.7% to a daily average of 2.7 million barrels for the full year. The increases were driven by new projects in the U.S. and Nigeria and expansion at the Tengiz project in Kazakhstan. Chevron's output in 2008 was cut by hurricanes, Oppenheimer & Co. analyst Fadel Gheit noted.

For 2010, the company said it expects to increase oil-and-gas production by 1% to 2.73 million barrels a day if oil prices average about $62 a barrel. On Friday, oil futures fell 75 cents to $72.89 a barrel in New York.

Chevron said the estimate doesn't take into account certain variables, including any curtailments the Organization of Petroleum Exporting Countries imposes in countries where it has operations. [There were zero such curtailments in 4Q09.]

Credit Suisse analysts said the outlook was disappointing as it is below the 2.7% growth they had forecast.

Chevron said it added about 1.1 billion barrels of net oil-equivalent to its proven reserves in 2009, aided by gains at the Gorgon Project in Australia and the Athabasca Oil Sands Project in Canada. The additions, which are subject to final review, equate to 112% of net oil-equivalent production for the year.

The oil giant also confirmed its capital-and-exploratory budget this year will be $21.6 billion, a 2.7% drop from 2009.‹

[DewDiligence]

Chevron Pushes Ahead in Lower Tertiary GoM

[From Sunday’s SF Chronicle; #msg-45326764 is a good companion read.]

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/04/11/BUU01CS3F1.DTL

›By Brett Clanton
Sunday, April 11, 2010

Right now, on the outer edge of the Gulf of Mexico, Chevron Corp. is making a big bet that, nearly 6 miles below where it has parked a new high-tech drillship, it will find enough oil to make this $1 million-dollar-per-day wager pay off.

Years of research and planning have brought the San Ramon oil giant to this point, and to this solitary location about 190 miles southeast of Houston, where water depths reach nearly 7,000 feet and a vast, uninterrupted expanse of sea is the only view.

Now the only thing left to do is wait, as a drill bit far below inches closer to a target that may or may not exist.

"You can do all the planning you want," said Tom Jones, drilling superintendent of Chevron's Moccasin prospect, aboard the new rig called the Discoverer Inspiration. "But there's only one way to find out, and that's to drill a well."

The fact that one of the world's biggest oil companies has found itself here underscores how difficult the global hunt for oil has become. It also helps explain why the Gulf of Mexico has recently taken on greater importance in that search.

As oil companies face limited access to new reserves elsewhere around the world, the heavily explored U.S. basin - with its established oil and natural gas infrastructure and stable fiscal regime - has grown more attractive.

Oil companies "understand the financial risk in the Gulf of Mexico and are a whole lot more comfortable with that than some of the other areas they might consider going to work," said Steven Newman, CEO of Switzerland drilling contractor Transocean Ltd., owner of the Discoverer Inspiration.

BP, the largest oil and gas producer in the Gulf, recently relocated its global exploration and production business to Houston from Europe as it eyes growth in the U.S. offshore area.

For Chevron, the deepwater Gulf of Mexico is the largest of four geographic focus areas for the company. As such, it receives "more than its fair share" of company resources – of the $17.3 billion the company will spend in 2010 on its upstream oil and gas exploration and production budget, $4.1 billion will go to the United States [#msg-44482939], including the Gulf of Mexico, and will for the next five to 10 years, said Gary Luquette, president of Chevron's North America Exploration and Production Co. in Houston.

"I've heard the term used, a resurgence in the deepwater Gulf of Mexico. But for us, this has been a constant purpose now for nearly a decade," Luquette said.

And President Obama's new plan to open more U.S. waters to drilling in the coming years, including parts of the eastern Gulf of Mexico and Atlantic coast, will allow Chevron to sustain investments in the Gulf of Mexico beyond what it is planning today, he said.

Major oil companies have focused particular attention on an ancient rock bed geologists call the Lower Tertiary trend, which runs miles below the sea floor in an outer rim of the U.S. gulf between Texas and Louisiana.

Thought to be the biggest U.S. oil discovery in generations, Lower Tertiary fields are expected to help offset declines in shallow water fields and lift overall output of the Gulf of Mexico, which today accounts for about a quarter of U.S. oil production.

But the region presents huge technical and cost challenges.

Not only are fields often found in waters 2 miles deep, but oil and gas deposits, buried under think salt layers, are hard to detect in geologic surveys. Also, extreme temperatures and pressures in reservoirs test equipment.

Last month, Shell became the first to begin commercial production of oil from Lower Tertiary fields at its $3 billion Perdido hub.

The industry's success rate in the deepwater Gulf of Mexico is roughly 1 discovery for every 3 exploratory wells drilled, she said, although others peg it closer to 1 in 8. [Why such a wide disparity between these estimates? Comments?]

Either way, the odds of coming up empty remain frighteningly high, as do the consequences: Each dry hole is estimated to cost at least $100 million.

Last year, Chevron racked up four misses in the deepwater gulf but also celebrated the huge Buckskin discovery, in an area known as Keathley Canyon, that will help cover outlays for the dry holes.

The Moccasin well Chevron is drilling today is about 5 miles southeast of the Buckskin. The plan calls for a well drilled to a depth of 29,000 feet - which includes the 6,750 feet of water between the ship and the sea floor.

On a recent visit to the Discoverer Inspiration, it was evident that drilling operators were about a third of the way to the target. A geologist on board analyzed rock and salt "cuttings" returned to the surface for clues about what the formation may hold.

If need be, engineers with real-time well data can recommend small adjustments to the path of the drill bit, which operators can make with joysticks from a control room on the ship.

But they can only "see" where the bit is now. Chevron, despite the millions spent getting to this point, still remains blind to what's ahead.

"Exploration is what it is," said Jones, the drilling superintendent. "It's a shot in the dark."‹