Chevron Curbs Ambitious New Projects to Shield Dividends

  • Investor payouts cost Chevron about $8 billion a year
  • Tengiz final investment decision is expected this year

Chevron Corp. is putting the brakes on all but one major oil project for the foreseeable future as collapsing crude prices make most new investments unprofitable.

The world’s third-biggest oil explorer plans to reduce spending on drilling rigs, oil platforms and other developments by about 26 percent during the next two years to ensure it has ample cash for dividends, Chairman and Chief Executive Officer John Watson said on Tuesday.

Aside from a multibillion-dollar expansion of Chevron’s Tengiz field in Kazakhstan, the only large projects the company will spend money on are those already under construction, Watson told a group of reporters after his annual strategy presentation to analysts in New York. Chevron is finalizing designs and acquiring camp beds for work crews in anticipation of making a formal investment decision this year, he said.

“We need better prices for more long-cycle time projects,” Watson said, “Ultimately, prices have to support investments.”

Chevron and its partners in Tengiz probably will resort to external funding sources to finance the Tengiz expansion, Watson said without providing additional details. He declined to provide a total cost estimate.

Spending Cuts

Oil explorers around the world have been cutting hundreds of billions of dollars in project spending to weather the worst oil-market downturn in a generation. Chevron estimated it will spend between $17 billion and $22 billion annually over the next two years on capital projects. The mid-range of that estimate amounts to a 26 percent reduction from the mid-range of this year’s $25 billion to $28 billion budget.

The company is scaling back exploration in some regions, though it is proceeding with plans for three new deepwater wells in the Gulf of Mexico this year and about 175 onshore wells in the Permian Basin of Texas and New Mexico. Deepwater wells can cost more than $100 million apiece, whereas Chevron’s Permian wells cost around $7 million each.

Chevron’s teams of geologists and engineers have identified 1,300 Permian drilling sites that can deliver returns of at least 10 percent with crude prices below $40 a barrel, Watson said. Another 2,700 sites can reach that 10-percent profit hurdle with prices of $50 or lower.

‘More Measured’

“In frontier areas, we’re being much more measured” in terms of exploration spending, he said.

Chevron declined 1.5 percent to $89.34 at 11:08 a.m. in New York, tempering an 8.7 percent rally over the previous five sessions. The shares have fallen 14 percent in the past year, beating the 19 percent average decline for the Standard & Poor’s 500 Energy Index of 40 companies.

Despite the slump in crude prices, Watson told analysts on Tuesday his top priority remains investor payouts.

“Our objective is to maintain and grow the dividend,” Watson said. Chevron will tap its credit line if necessary to cover its $1.07-a-share quarterly dividend, he said.

Glut Easing

Watson said he expects the supply overhang in global oil markets to disappear some time in 2017 as low prices discourage some drilling and demand expands. Oil and gas production from the company’s 48,000 wells may be flat or rise as much as 4 percent this year, according to a slide presentation that accompanied Tuesday’s meeting. Output will grow annually through the end of the decade, Watson said.

Exxon Mobil Corp. is the world’s biggest oil producer by market value, followed by Royal Dutch Shell Plc and Chevron, according to data compiled by Bloomberg.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE