Michael Wirth, Chevron’s new chief executive, has said the company plans to maintain a tight grip on capital spending, despite the surge in oil prices over the past year and warnings that they could rise even higher over the next few years.
In an interview Mr Wirth, who took up his post in February, said he wanted Chevron to be able to cover its dividend from its free cash flow at an oil price of $50 a barrel, well below today’s level of about $70 a barrel for Brent crude.
He stressed the importance of controlling costs, sticking to capital spending budgets and generating cash to pay the dividend, rather than pursuing every possible opportunity for growth.
“We have increased our dividend payment for 31 consecutive years,” he said. “Our shareholders know that, and they value that.”
The slump in oil investment since prices collapsed in 2014 has prompted a swelling chorus of warnings from analysts and executives that world crude production growth could fail to keep pace with demand, leading to shortages and soaring prices in the next decade.
Mr Wirth acknowledged that was possible. “Welcome to the oil business: it’s what it’s always been,” he said. “Prices are hard to predict: it’s a commodity market.”
However, he added, his aim was “to win in any environment”, and he still had work to do to make Chevron more competitive at times of low prices.
“We’ll see prices higher than they are today, and we’ll see prices lower than they were in the past . . . And we have to have a portfolio that’s resilient,” he said.
“We’ve proven we can survive at $50. The challenge to our organisation is: how do you thrive at $50?”
Like his peers Darren Woods at ExxonMobil and Ben van Beurden at Royal Dutch Shell, Mr Wirth had spent his career mostly in the group’s “downstream” operations, in supply, trading and chemicals, rather than in oil and gas production, before being chosen last year to succeed John Watson as chief executive.
Those downstream businesses typically reward a parsimonious and careful management style rather than ambition and risk-taking, and Mr Wirth accepts that background has influenced his approach.
“Costs always matter, capital discipline always matters. Safety and execution and reliability always matter,” he said.
There is evidence of that thinking in the contrast in capital spending strategies between Chevron and its US rival Exxon. Exxon is planning a steady increase in capex and exploration spending, from $23.1bn last year to $28bn next year and about $30bn a year from 2023.
Mr Wirth, by contrast, plans to spend about $18bn-$20bn a year out to 2020, a slight tightening from Mr Watson’s planned investment of $17bn-$22bn a year.
“We’ve indicated we’re going to keep capital spending flat. We’re in a higher price environment, [but] we haven’t changed our capital budget, and I don’t expect that we will,” Mr Wirth said.
“We will not fund every project. We will have projects that meet our economic hurdles, but we’ll choose not to fund, because we’ll have better options.”
Paul Sankey, an analyst at Mizuho, commented last month that Chevron was in “a multiyear sweet spot”, with its production volumes rising at an average of about 6 per cent every year to 2020 thanks to the company’s heavy investment earlier in the decade, even though it had now cut capital spending sharply.
That growth rate is high for a large international oil company, and compared favourably to Exxon, which was being forced to increase capital spending “to offset struggling volumes”, Mr Sankey said.
Mr Wirth’s priorities for spending include the $37bn expansion at the giant Tengiz oilfield in Kazakhstan, and rapid growth in the Permian Basin of Texas and New Mexico, an area where Chevron has for decades owned land, and that has in recent years turned into the white-hot centre of the US shale oil boom.
Chevron had a slow start in shale. As Mr Wirth admits, the running was made by small and mid-sized companies that were leaner and nimbler, with lower costs and faster rates of innovation. But he argues that Chevron has now caught up, and its size is becoming a strength rather than a weakness.
Its production in the Permian Basin at the end of last year was 200,000 barrels of oil equivalent a day. By the end of March, it had risen by a quarter, to about 250,000 boe/d.
“The shale game is becoming a scale game,” Mr Wirth said.
“We’re in a factory drilling mode now, where we’re drilling hundreds of wells. And that is all about factory-type efficiencies. Small improvements in things that you repeat many times become big improvements.”
The result of those improvements, he added, was that “a well in the Permian Basin is more economic than anything else we can do”, with rates of return of more than 30 per cent even with oil prices below today’s levels. While the business is growing, it still needs financing from the group, but Mr Wirth expects it to be generating cash by 2020.
His expectations of the long-term strength of US shale underpin his emphasis on the need to be careful about investment decisions. Oil developments that have significantly higher costs than US shale will struggle to be viable.
“Frontier-type projects, the riskier investments, are now . . . not as necessary,” he said. “And I think that has implications for everyone.”
For Chevron, that meant every project it invested in would have to be “best in class”, he said. “It can’t just be the kind of project you might have funded historically, because we’ve got better options.”
Lessons learnt from cost blowouts
John Watson, Chevron’s chief executive from 2010 until February, in many ways had a successful run, with the company’s share price comfortably outperforming that of its US rival ExxonMobil.
However, his tenure was overshadowed by the colossal cost overruns and delays at Chevron’s two large liquefied natural gas projects in Australia, Gorgon and Wheatstone. The combined cost of the two developments overshot their original budgets by $22bn, half of which was borne by Chevron, and half by its partners.
Mr Wirth said Chevron was “really glad” to have Gorgon and Wheatstone, which were “going to deliver value to our shareholders for decades to come”.
He conceded, however, that there were a “number of lessons” that the company was learning to try to avoid similar cost blowouts in the future.
One crucial factor, he said, was making more careful preparations before committing to an investment: making more progress with the initial engineering work, and ensuring that the site had all the necessary infrastructure was in place. Better preparation could mean “things as simple as [having] the food and the housing of people all squared away, so those don’t become issues,” he added.
New technology can also help. Oil and gas is a data-intensive industry, and applying new technologies for analysing and using data is one of Mr Wirth’s priorities, “to innovate our way to more economic outcomes”, he said.
Even with those improvements, however, Chevron is not rushing into any more Gorgon and Wheatstone-scale giant greenfield developments. Its largest project is the expansion of an existing oilfield in Kazakhstan.
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