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Morningstar | Maintaining Chevron's FVE Despite Loss of Asian PSCs Thanks to Permian Growth

In recent years, Chevron's oil portfolio has led to peer-leading margins and returns on capital. New production from the Permian Basin, Gulf of Mexico, West Africa, and Western Australia will preserve its liquids price exposure and serve as the growth engine for Chevron in years to come, setting it up for peer-leading growth during this year. Two liquefied natural gas projects in Australia, Gorgon and Wheatstone, will be the primary drivers of growth. Gorgon, which started in production in 2016, will add more than 200,000 barrels of oil equivalent per day once its three trains reach peak production in 2018. Wheatstone, which started operations in mid-2017, will add another 200 mboed once fully operational in 2018. The investment in LNG production, while primarily gas volumes, has prices largely indexed to oil, which should allow Chevron to preserve its peer-leading liquids exposure. 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, to achieve its growth, Chevron has spent more on a per-barrel basis than peers while at the same time experiencing budget overruns on the Gorgon project. As a result, we expect returns to be lower in the coming years on a combination of lower earnings and increased capital employed. That said, we expect cash flow to rise during the next five years thanks to improving oil prices, cost-cutting, and increased production. Free cash flow should increase as capital spending declines due to Chevron investing in shorter-cycle, less capital-intensive projects like unconventional production in the Permian Basin and brownfield expansions of existing projects, which will also deliver the next stage of production growth.Chevron's Permian position is a real differentiator to peers, given its size, quality, and lack of royalty. Progress in improving cost and performance has prompted the company to increase investment in the basin. Currently producing 270 mboed, it could ramp production to over 600 mboed in 2022.