Chevron opts to keep massive budget in bid to boost output

By Ernest Scheyder

Jan 31 (Reuters) - Chevron Corp plans to keep

spending roughly $40 billion per year for the next several years

on new oil and natural gas projects in a bid to lift production

that is on track to be flat for the third straight year.

That stay-the-course approach, announced on Friday after the

second-largest U.S. oil company said its quarterly profit

dropped 32 percent, spooked investors and prompted the stock to

fall 3.5 percent, the most of any large energy producer this

quarter.

Like Exxon Mobil Corp, Royal Dutch Shell (Xetra: R6C1.DE - news)

and other international energy companies, Chevron (Amsterdam: CHTEX.AS - news) has tried to

offset declining production at its existing oil and natural gas

wells by spending massively on new exploration projects.

But Shell announced earlier this week that it would focus

more on energy projects that have the best chance of success,

cutting spending and also selling underperforming assets. The

news boosted Shell (LSE: RDSB.L - news) 's stock.

Chevron has taken the opposite approach and plans to keep

the cash flowing. It spent $41.9 billion last year on energy

projects, a 23 percent increase from 2012. Chevron Chief

Executive John Watson said he expects capital spending to be in

the $40 billion range for the next few years.

Chevron is betting that its relatively high dividend yield

for the energy industry and its large stock buyback program will

appease investors until five of its major projects, including

two massive liquefied natural gas projects in Australia and

deepwater wells in the U.S. Gulf of Mexico, are online.

"Basically it's a treadmill," said Oppenheimer & Co analyst

Fadel Gheit. "Yes, all these new projects will add oil. But

guess what, until they hit that goal, their base line production

is declining."

Chevron's oil and natural gas production fell 3.4 percent in

the fourth quarter to 2.6 million barrels of oil equivalent per

day (boed).

Rising production in the United States and Nigeria wasn't

enough to offset declining production at legacy fields around

the world, which typically see production slip 4 percent

annually, Chevron said.

For 2014, Chevron expects total production of 2.6 million

boed, up only 0.5 percent from 2013 levels. The estimate missed

Wall Street's expectations and disappointed investors, who had

hoped 2014 would be a "positive transition year" toward 2017

when new projects come online, Credit Suisse (NYSE: CS - news) analyst Edward

Westlake said in a note.

Even if Chevron hits its 2014 production goal, it would only

be on par with 2012 levels.

Looking forward, Chevron said it has made significant

progress on its five main growth projects. In total, the five

new protects will add 500,000 boed in production, the company

estimates, once fully online.

"We are in a depleting resource business, and you do need to

add to the portfolio," Watson said on a conference call with

investors.

Last year the company said by 2017 it expects daily

production to be 3.3 million boed.

The company reported net income of $4.93 billion, or $2.57

per share, compared with $7.25 billion, or $3.70 per share, in

the year-ago period.

The quarterly profit met expectations of Wall Street

analysts, according to Thomson Reuters I/B/E/S.

The results were not a total surprise to Wall Street, as

Chevron hinted earlier this month that its fourth-quarter profit

would be "comparable" with third-quarter results, when it posted

net income of $4.95 billion.

In refining, profit plunged 58 percent due to shrinking

margins, largely due to price differentials between different

types of crude oil.

Refiners make more money when the price difference between

various types of crude oil is wide. When the gap narrows in the

price differences, costs tend to rise. Exxon on Thursday posted

weakness in its own refining unit.

Profit also fell in Chevron's smallest unit, the power

generation and mining unit.

Chevron shares fell $4.02, or 3.5 percent, to $112.40 in

afternoon trading. The stock is down about 2.4 percent over the

past 52 weeks.