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Morningstar | Chevron Turns to the Permian for the Next Phase of Its Growth

Historically, Chevron has benefited from an oil-leveraged portfolio that has led to peer-leading margins and returns on capital. We expect it to maintain its edge as it moves into the next phase of growth, which is centered on leveraging its large Permian Basin position. Chevron is delivering robust growth because of new production from the Permian Basin, Gulf of Mexico, and western Australia. In 2018 it realized peer-leading volume growth of 7% and expects similar results in 2019, with growth of 4%-7% because of continued shale growth and LNG project ramp up. Its two liquefied natural gas projects in Australia, Gorgon and Wheatstone, have been the primary drivers of growth, collectively adding 400,000 barrels equivalent of oil a day, once at peak production in 2019. The investment in LNG production allows Chevron to preserve its peer-leading liquids exposure as prices are largely indexed to oil. Also, projects like LNG, with long-plateau production levels that require little additional capital expenditure, help reduce decline rates while generating significant free cash flow to support reinvestment elsewhere or shareholder returns. However, these projects will also weigh on returns as they were sanctioned at the top of the cycle and experienced budget overruns (Gorgon). Positively, however, we expect cash flow to rise during the next five years because of improving oil prices, cost-cutting, and the addition of higher-margin volumes, which should result in greater free cash flow despite a modest increase in capital spending during the past few years. Spending will also be directed towards shorter-cycle, less capital-intensive projects such as unconventional production in the Permian Basin and brownfield expansion of existing projects that provide flexibility and deliver high returns. Chevron's next phase of growth will be driven by its differentiated Permian position (size, quality, and lack of royalty). Progress in improving cost and performance has prompted the company to increase investment in the basin. Currently producing 380 mboed, it expects to ramp up production to over 900 mboed in 2023, resulting in total production growth of 3%-4% CAGR through 2023.