It is really interesting to watch money talk when the corporation is considered a major oil and gas company. Chevron (NYSE:CVX) from time to time makes money talk plenty. Shareholders are likely benefitting from all that chatter for years to come.
First came the offer for Hess (HES) which management briefly discussed during the conference call. Hess recently reported earnings of $3.17 per share as Guyana production soared to about 190,000 BOD from 112,000 BOD.
Note that the Bakken production also climbed a respectable amount. But clearly the profit boost came primarily from the Guyana production boost (in addition to some help from commodity prices).
This should bring into perspective that the primary asset of Hess in terms of earnings power has got to be Guyana. Clearly there are not many earnings power left if Guyana is out of the picture.
The longer the dispute with Exxon Mobil (XOM) goes on, the more valuable this asset becomes because roughly once per every year to 15 months or so, a new platform begins production. Each platform has a gross production in the 200,000 BOD range. Therefore, from the looks of things, the Hess profitability is going to "shoot up like a rocket" going forward.
Admittedly, the growth rate will slow as each platform adds to a larger base of established production over time. However, as shown above, growth can slow quite a bit and still be on the fast side for some time to come.
Chevron Strategy
Chevron appears to be a company that is not really "big" on pure exploration. Instead, this company is willing to allow others to establish a new field (as is the case here) and then buy its way into the action. In this case, the "buy in" comes in the form of an acquisition offer for Hess.
Now, if Exxon Mobil happens to be proven correct, then all a right of first refusal means is the potential for a bidding war. There is nothing so far that would indicate that Chevron cannot raise the price if the Hess partners are interested in the right of first refusal to acquire the Hess interest. A right of first refusal does not mean that Hess must sell to the partners (period). But it does give them rights to attempt to buy "first" (as in match or refuse to match). If the purchase price gets too high, those same partners have the right to walk away just like anyone else would.
The Venus Discovery
Chevron is now acquiring acreage near the Venus discovery in South Africa. The latest acquisition of acreage was announced on April 29. But there was also reference to more acreage during the first quarter conference call.
Chevron operates a key income producing asset for Africa Oil (OTCPK:AOIFF) as shown above off the coast of Nigeria. However, the Venus discovery off the coast of Namibia is the latest "world class" discovery to attract attention. So, Chevron is acquiring strategic acreage near that discovery.
Meanwhile, South Africa may benefit from the Venus Discovery as well and South Africa has other discoveries. One of those discoveries is shown on the map above. Now that others have found oil, Chevron management is busy figuring out the acreage to acquire to reduce the offshore exploration risk.
As an aside, note that TotalEnergies (TTE) is the operator of the Venus discovery with Africa Oil.
The Chevron Strategy
This time around Chevron will buy acreage that requires exploration. That acreage is unlikely to have significant established production. But it will be located strategically close to discoveries made to reduce the exploration risk.
This is typical of large companies. Smaller companies take the pure exploration risk while a large company like Chevron either buys its way into a discovery as is likely the case with the Hess offer or as is the case in Africa where the company will simply outbid others to obtain a good acreage position.
Production Outlook
Production growth is running ahead of guidance due to the PDC Energy acquisition.
As management notes, there will be some asset sales because nearly any acquisition comes with some acreage that is not relevant to the acquirer. Additionally, the acquisition nearly always makes some legacy acreage unable to successfully compete for capital dollars. In any event, whatever becomes noncore acreage will be disposed of likely after the Hess acquisition.
Cost Cutting
Similar to Exxon Mobil, this company has a cost-cutting campaign underway. Technology improvements that periodically sweep the industry make a rearrangement of operations a necessity. Otherwise, what was acceptable costs become sky-high costs over time.
Some of the more obvious rationalizations occur due to the acquisitions. But technology is advancing so fast that it forces a campaign to constantly lower operating costs.
This continues to add Tier 1 acreage every year. Some companies discuss this while others simply report more possibilities over time. In any event, more Tier 1 acreage has been a phenomenon in this industry for as long as I can remember. For that reason, we are very unlikely to run out of Tier 1 acreage long after I am gone as long as technology continues to advance.
Main Idea
Major companies like Chevron prefer to allow other companies to take the raw exploration risk. A company like Chevron is willing to pay for acreage with an improved risk-reward in a number of ways. Some examples include the offer for Hess Corporation and the acquisition of acreage in Namibia and South Africa.
For this reason, Chevron remains a strong buy. Rarely can one find a company that will likely grow in the upper single digits each year, combined with a growing dividend. The lower risk of an integrated oil and gas company combined with the very high debt rating make this an unusually safe growth and income idea.
Therefore, this investment idea could well appeal to a wide variety of investors. Personally, I would not sell unless the long-term story changes materially. Oil and gas remain historically cheap in this market. There is probably a fairly long ways to go before one needs to consider selling.
Risks
Chevron could at some point pay too much for an acquisition, which would result in a profitability disappointment.
Commodity prices are extremely low visibility. Therefore, these stocks tend to be fairly volatile as they follow the commodity prices. Even the integrated companies like Chevron (with that diversification) tend to follow oil and gas prices.
The loss of key personnel could set the company back. Usually with a company this large it is not the issue that it is with smaller companies that have a lot less staff. However, there could be some irreplaceable people in the organization.
The company could have no exploration luck starting "tomorrow" and lasting an unexpectedly long-time. That would put a lot more pressure on management to find deals to buy into attractive discoveries or established basins.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Long Player believes oil and gas is a boom-bust, cyclical industry. It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA. He leads the investing group . He looks for under-followed oil companies and out-of-favor midstream companies that offer compelling opportunities. The group includes an active chat room in which Oil & Gas investors discuss recent information and share ideas. Learn more.
