By Tobias Burns
Energy companies are responding to the lowest oil prices in five years by tightening their belts and cutting back on investments, but in the case of Chevron Corporation, the second largest U.S. energy company, analysts are doubtful that these measures will have any real effect.
“Ultimately, we think most of these efforts will prove unsuccessful,” said Paul Sankey, a managing director at Morningstar, Inc. “Returns will remain near current levels without higher oil prices.”
Worldwide oil prices have fallen 21 percent since mid-June, the biggest four-month drop in more than five years. West Texas Intermediate crude for December delivery closed Tuesday at $81.38, a gain of 38 cents from Monday’s closing price.
Slowed growth in China, decreased demand from Europe and a production boom from North America and the U.S. in particular, which is now the world’s largest oil and gas producer, have all contributed to the price drop. If oil prices continue to decline (Russian oil giant Gazprom has predicted a drop to $70 per barrel in the coming months) major oil companies will face further pressures.
Earlier this month Chevron announced a plan to sell 30 percent of its interest in a Canadian Duvernay shale consortium to a Kuwaiti oil company. In January, the oil giant began shopping some of its storage and pipeline operations in Texas and Louisiana. Last year the company sold a pipeline subsidiary to Tesoro Logistics LP for $355 million.
“We’re seeing conservative long-term spending plans, which is a good thing,” Pavel Molchanov, an energy analyst at Raymond James Financial, said in an interview. “It’s having a positive effect upon cash flow.”
Spending by energy companies is headed for a 4.2 percent decrease on the year, according to an estimate by Tobias Lefkowitz, Citigroup Inc.’s chief U.S. equity strategist. This is in stark contrast to companies outside of the energy sphere, which are expected to increase capital expenditures by 5.1 percent in 2014.
The drop in oil prices comes as Chevron has new oil discoveries and several big projects on the horizon.
Last week, the company reported striking oil in a new region of the Gulf of Mexico. The well, which would be owned jointly with BP, would be one of the deepest in the Gulf, though it’s “too early to tell how significant this discovery is,” Molchanov said.
Chevron also has the Gorgon project, a $54 billion venture to unlock gas deposits in Western Australia, that will give Chevron access to a bigger stake of the lucrative liquified natural gas market. To date, though, Chevron has signed contracts for only 65 percent of the Gorgon’s estimated output, which is 20 percent shy of the industry’s standard pre-production mark of 85 percent, according to a report by Thomson Reuters.
Despite these initiatives, Chevron stock will likely continue to shadow the price of oil. The stock is down 2.8 percent on the month to $115.02, having hit its low point on Oct. 15, the same day that oil bottomed at $79.85 a barrel.
Analysts say that corrective measures from the Organization of Petroleum Exporting Countries, such as a curb in production, is unlikely.
“OPEC doesn’t want to change the price of oil because they’re concerned about U.S. production and whether or not we’ll be successful,” said Phil Flynn, an oil analyst at Price Group.
“Only market forces will pick the price back up,” he added.
Some analysts see a different geopolitical rationale behind OPEC’s inaction, citing Saudi Arabia’s dissatisfaction with Russia, which is also feeling the sting of the price drop. Russia has taken a very different stance from Saudi Arabia on a variety of issues affecting the Middle East, including bolstering the government of Bashar Al-Assad in Syria.
Of the 30 analysts surveyed by Bloomberg LP, 15 have a buy rating on Chevron while 14 have a hold and one has a sell. The median target price for the stock is $133.