Debt Reduction or Asset Sales; What’s the Answer to Chevron Corporation Woes?

Debt Reduction or Asset Sales; What’s the Answer to Chevron Corporation Woes?

We take a look at Chevron’s current focus on addressing the low oil price environment concerns

By Staff Writer on Sep 17, 2016 at 11:40 am EST

The ordeal of the oil market has created havoc in the oil industry. It has prompted majority of the energy companies to slash capital expenditure by billions of dollars, in addition to reducing workforce and offloading assets at lower price.

Even the world’s leading oil companies are adversely affected by this downturn. In order to deal with this, they have planned massive asset sales to use their proceeds to meet debt obligation. Oil was trading at $115 per barrel in the summer of 2014, which enticed the oil companies to expand operations through debt financing and take advantage of the high oil price environment. However, contrary to expectation, oil steeply fell on the back of crude oil glut and settled below $30 per barrel in February 2016. This created hardships for the companies to make timely coupon and bond principle payments.

What’s Up with Chevron Corporation?

Chevron Corporation (NYSE:CVX) is no exception as the company intends to strengthen its balance sheet by raising $5-10 billion from asset sales. Moreover, the company’s management responded to the lower oil prices by contracting drilling programs and abandoning oil discoveries, which were too costly in the current low oil price environment, while also laying off one-tenth of its work force.

Beyond market’s expectation, Chevron posted third-quarter loss of $1.47 billion, translating into loss per share of 78 cents. This compares with the year’s earlier net profit of $571 million or 30 cents. The bottom-line loss is Chevron’s third consecutive quarterly loss, which reflects the severity of the doldrums in oil market.

Despite oil price bust and credit rating downgrade by Moody’s Investor Services and Standard & Poor's, Chevron Corporation announced to invest $37 billion in Kazakhstan oil field in May to increase output. On the flip side, the oil giant announced to pay out $1.07 per share dividend following its second-quarterly results that would burn up to $2 billion, and will be paid out in September.

Recent Development

According to Bloomberg, China General Natural Power Corporation has once again been invited by Chevron Corporation to participate in the second-round bid for the company’s Asian geothermal energy. The company is expected to raise as much as $3 billion through this transaction. The world’s leading oil and gas integrated company intends to monetize its Asian geothermal holdings located in Indonesia and Philippines as the geothermal energy is created by the heat of the earth.

According to Chevron’s website, the company owns Chevron Geothermal Salak – subsidiary of Chevron - which has one of the largest geothermal operations in the world, having a total operating capacity of 377 megawatts.

Debt, liquidity and Capital Spending Position

As of June 30, 2016, Chevron Corporation had a total debt of around $45.01 billion, while its cash and cash equivalent stood at $8.764 billion. Both of the key liquidity and leverage metrics are deteriorating with the passage of time. Following chart illustrates Chevron’s debt and cash position in the past couple of quarters.

While the company has been increasing dividends to the shareholders every year for at least 25 years, the massive gap between cash and debt keeps investors and analysts worried about a potential reduction in annual dividend payments. To bridge the gap, company has lowered its capital and operating expenses and is also raising cash through asset sales.

After its profits and revenues plummeted on the back of low oil price, Chevron lowered its capital spending. The California-based company now estimates that its capital spending for 2017 and 2018 will range between $17 billion and $22 billion, down from the ongoing budget estimate of $25-28 billion.

Reduction in capital spending has been a popular counter measure to adapt to the low oil price environment. According to financial consultant firm, Wood Mackenzie Ltd, the oil and gas industry is expected to slash $1 trillion from budgeted spending on exploration and production due to historic slump in oil price.

While the company is making efforts to reduce its debt obligation, the debt-to-equity is seen rising.

Final Thoughts

Despite the fact that oil prices have recovered by more than 60% since its February lows, it is still quite cheap as compared to 2014 levels. There is a lot of optimism in the oil market that companies will cut cost and improve operating efficiencies to offset the impact of the low oil price. However, we believe that the company should focus more on strengthening its balance sheet through asset sales, rather than looking to invest in other parts of the world.

In an interview by Oppenheimer’s Senior Energy Strategist to Bloomberg TV, FadelGheit contends that, oil companies cannot recover from steep plunge in oil price despite efficient cost saving programs, considering the fact that oil price has gone down significantly in the last 24 months.

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