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Commentary

Chevron: One of the Better Opportunities in Energy

Despite a sharp reduction to future capital spending, Chevron still will deliver peer-leading growth over the next two years and holds the potential for additional growth in 2018 and beyond.

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Responding to the lower-for-longer outlook for oil prices,  Chevron (CVX) announced a sharp reduction to future capital spending in order to improve capital efficiency and safeguard the dividend. It now expects to spend $25 billion-$28 billion in 2016 and $20 billion-$24 billion in 2017 and 2018. Guidance from its March analyst day indicated capital spending of about $32 billion in 2016 and about $30 billion in 2017.

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.

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Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.