Chevron: One of the Better Opportunities in Energy

Responding to the lower-for-longer outlook for oil prices,

We had already trimmed those March figures for use in our valuation model in anticipation of a reduction, but the new guidance will cause us to reduce our estimates further. The reduction in spending is a function of major project completion, project deferrals, and cost deflation. The lower spending is not without consequences, however, as Chevron also lowered its 2017 production target from 3.1 mmboe/d to 2.9-3.0 mmboe/d as a result of a higher base decline rate and slower-than-expected shale production growth. However, Chevron still will deliver peer-leading growth over the next two years and holds the potential for additional growth in 2018 and beyond given its shale portfolio and the likelihood that deferred projects are eventually sanctioned thanks to lower costs. Chevron also increased its expected spending reductions to $4 billion from $3 billion last quarter while reporting a 7% reduction in operating costs and 13% lower upstream unit operating costs year to date.

We plan to incorporate the latest guidance into our model and expect the reduced production targets to partially offset the reduced capital spending, probably leaving our fair value little changed. As a result, we continue to see Chevron as one of the better opportunities in the space given valuation, dividend security, and asset quality.

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