Where Will Chevron (CVX) Spend the Bulk of Its 2018 Capex?

Chevron Corporation CVX offered a glimpse of its 2018 capital spending plans.

The company has set its capital and exploratory budget at $18.3 billion, down by 4% from its 2017 projected investment of less than $19 billion. Next year's budget is also around 18% lower than the company’s 2016 spending of $22.4 billion and down 46% from the 2015 expenditure of $34 billion.

Revised downward for the fifth consecutive year, the second-biggest U.S. oil and gas group's cut in capital spending reflects Chevron's plans to optimize its expenses, while relying increasingly on shale drilling.

During the nine months ended Sep 30, 2017, Chevron incurred capital expenditure of $13.4 billion, approximately 89% of which went toward its upstream segment.

Analyzing Chevron's 2018 Capital Budget

Of the American multinational's total 2018 capital expenditure, a little over 86% is planned to be incurred in its upstream operations. In particular, Chevron is concentrating on increasing its investment in shale as it strives to boost its U.S. shale production next year. For 2018, the company intends to spend $4.3 billion in shale – up 70% year over year – the lion's share (or $3.3 billion) going to the lucrative Permian Basin of Texas and New Mexico alone. The remaining $1 billion has been set aside for other shale investments. Overall, the oil giant plans to shell out $6.6 billion for its domestic upstream operations. An additional $9.2 billion will target international upstream projects.

Over the last few years, majority of the capital expenditure in its 'Upstream' segment were dedicated to Australian LNG projects – Gorgon and Wheatstone – and the Tengiz field in Kazakhstan. But having completed both Gorgon and Wheatstone, Tengiz remains the only large capital project Chevron is committed to, for which the company has allocated $3.7 billion out of a total $5.5 billion for projects already underway. Meanwhile, Chevron has earmarked approximately $8.7 billion to sustain currently producing upstream assets.

According to Chevron's outgoing chief executive, John Watson, the company is looking to concentrate on projects that offer a combination of “strong production growth and solid free cash flow”. In fact, Chevron expects 75% of its exploration and production spending to realize cash flows in two years of investment – most of these projects being shale developments.

The Permian Advantage

Experts say that it’s cheaper to drill and complete oil wells in the Permian Basin than most other major fields. Moreover, there are certain parts of the shale play whose well-returns are the best in the U.S. With crude prices still down significantly from their 2014 levels, well returns have become a very important metric to gauge profitability.

Permian’s attractive economics means that producers can still make money there at the current, just over-$50-a-barrel price. This is mainly because of the region's extensive pipeline infrastructure, plentiful labor and supplies, and relatively warm winters that makes year-round work possible. Most other domestic shale regions need prices above $60 to support new developments and expansions.

Apart from Chevron, other large U.S. oil producers ramping up shale investments are ExxonMobil Corporation XOM and ConocoPhillips COP.

Zacks Rank & Stock Picks

Chevron currently carries a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at a better-ranked integrated energy player like BP plc BP that sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

London-based BP is one of the largest publicly traded oil and gas companies in the world. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses. BP surpassed estimates in three of the last four quarters at an average rate of 26.8%.

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