Chevron bets on cost cuts, new projects: Update
The crude price drop is testing the strategies of majors and exploration-only independents alike as upstream earnings plummet. For Chevron, a key component of its plan is projects in Australia, the Gulf of Mexico (GoM) and Angola, whose low running costs will enable a 35pc overall cash margin improvement by 2017 from current levels, even as output grows.
"Cash flow growth is a near-term priority," chief financial officer Pat Yarrington said in the company's earnings call. "While absolute prices in the first quarter were not favorable, our production was."
In addition, the company is looking to further lower operating costs, which have already dropped 13pc from a year earlier, by negotiating terms with service providers and suppliers.
"To date, we have completed more than 2,200 supplier engagements, with 700 more in progress," she said. The company has already saved about \$900mn in its contracts.
Asset sales, and an expected decline in the capital expenditure (capex) budget as major projects come online, will offer additional relief. The company realized about \$6bn in asset sales last year and will be adding another \$4bn in the first four months of the year, with recently completed sales in Australia and Nigeria.
"In 16 months, we've achieved almost \$10bn in total sales proceeds, versus a \$15bn, 48-month target," Yarrington said. "We will continue to sell assets where we can generate good value."
Chevron's upstream profits fell to \$1.56bn in the first quarter from \$4.3bn a year earlier. In contrast, downstream profits surged to \$1.42bn from \$710mn a year earlier. Total profits fell by 42pc to \$2.6bn from \$4.5bn a year earlier.
Upstream income fell even as overall output increased 3pc from a year earlier to 2.68mn b/d of oil equivalent (boe/d). Chevron's Jack/St. Malo and Tubular Bells deepwater GoM projects and the Bibiyana field in Bangladesh helped increase output by 42,000 b/d during the quarter, while growth from its shale acreage in the Permian basin in Texas was 10,000 b/d.
Those increases will help overshadow a possible drop in output of about 76,000 b/d, touched in the first quarter, from the Neutral Zone (NZ) adjoining Kuwait and Saudi Arabia, as a result of political squabbles.
"It now appears more likely that out future production in the partition zone could be negatively impacted due to our inability to secure work and equipment permits," general manager of investor relations Jeff Gustavson said.
But any financial impact from the halt is likely to be minimal because of very low margins.
US upstream operations incurred a loss of \$460mn compared to earnings of \$912mn from a year earlier. Average sales price of crude oil and natural gas liquids was \$43/bl in the first quarter, down from \$91/bl. Natural gas was \$2.27/mcf compared with \$4.77/mcf.
Non-US upstream earnings fell by \$1.38bn to \$2.02bn. The average price for crude oil and natural gas liquids was \$46/bl, down from \$99/bl. Natural gas was \$5.01/mcf compared with \$6.02/mcf.
US downstream operations earned \$706mn compared with \$422mn a year earlier, while the non-US business earned \$717mn versus \$288mn. Both earnings surged primarily because of higher refining profits.
Cash flow from operations was \$2.3bn versus \$8.4bn in the same quarter last year. Capital and exploratory expenditures in the first three months were \$8.6bn compared with \$9.4bn a year earlier.
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