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ChevronTexaco (CVX)Stock (Energy Industry, Oil & Gas Majors Industry)
 The Chevron Corporation (NYSE: CVX) is the second largest energy company in the U.S., and is an oil and gas company engaged in exploration, production, refining, marketing, and transportation of petroleum products across the globe. Chevron has begun expanding rapidly in developing markets such as Asia and Latin America. This focus on emerging markets is driven by an increasing global demand for petroleum as well as limited supply of new oil reserves in the U.S. Refining capacity in the U.S. is also limited as the cost for establishing a new refinery in the U.S. and the related environmental restrictions are high; as a result companies are expanding their refining capacity in other countries to import gasoline to the U.S. in addition to crude oil. The recent consolidation in the industry have resulted in the creation of large companies in the U.S. that control gasoline prices and the bids for new exploration blocks. The five largest oil companies in the U.S. including Exxon Mobil, Chevron, ConocoPhillips, BP, and Royal Dutch Shell dominate the domestic as well as global oil production. These players control approximately 48 percent of the domestic oil production and have a global market share of 14 percent; in addition, they account for 50 percent of the domestic refinery capacity and approximately 62 percent of the retail gasoline market. Chevron has placed much importance on developing and implementing technology to improve all its existing processes. Technology is being used to reduce the time as well as energy required for various processes executed during exploration, production, and refining of oil, and research into improving such technologies could provide Chevron with an advantage over its competitors. For example, the company recently announced a partnership with MIT to develop ultra-deepwater drilling technology, to allow the company to search for oil at depths never before considered.
[edit] Company DescriptionChevron is one of the largest integrated energy companies in the world, with operations spread across 180 countries. The company produces energy from a variety of sources, such as coal, oil and natural gas, and recently began acting as a venture capital firm and investing in renewable energy companies like Chevron Energy Solutions, a group that recently announced that it would be installing a 1.1 MW solar grid at California State University at Fresno. As a vertically integrated corporation, Chevron operates across the entire supply chain – from exploration and production to refining, marketing, and transportation of petroleum products. The company is also involved in the production of chemicals, generation of power, and mining of coal and other minerals. In the first quarter of 2008, Chevron saw net income rise 6% sequentially and 10% year on year, to $5.2 billion. Higher natural gas and oil prices drove this growth, though lower production (down 2% sequentially) was the reason that profit gains did not match the 70% rise in oil price from the first quarter of 2007. High oil prices also hurt the company's downstream segment, causing sequential margins to fall $55 million in the U.S. and $10 million internationally. In the second quarter of 2008, earnings were up 11% year on year, at $6 billion.[1] International earnings were up $1.5 billion, while rising oil prices raised earnings by $1.3 billion.[1] Canadian production fell by 62,000 BPD, U.S. production fell by 13,000 BPD, and international production fell by 75,000 BPD.[2] Downstream operations saw a loss of $680 million, after a break-even first quarter.[2]
Chevron has undertaken a string of mergers and acquisitions during the last few years to expand its operations across the globe. In 2001, Chevron Corporation merged with Texas Company and formed ChevronTexaco. In 2005, it acquired the Unocal Corporation to establish its presence in regions such as Southeast Asia, the Caspian Sea and the deepwater Gulf of Mexico, and strengthen its position as a global leader. In the same year, the company was renamed Chevron Corporation to form a global brand name. The company does not entirely rely on the U.S. for the production of crude oil. In 2007, Chevron produced over 2.6 million barrels of oil equivalent per day, around 70 percent of the production spread across more than 35 countries. In 4Q07, from 3Q07, Chevron's U.S. production fell 11,000 boe/day in the U.S., but increased internationally by 33,000 boe/day[3]. As an example of Chevron's global focus, the company has been investing in development of an oilfield off the coast of Tahiti, which is expected to have a production capacity of 125,000 barrels of oil and 70 million cubic feet of gas per day. Chevron has a 58% interest in the project, whose production startup has been delayed until 3Q09 because of recent engineering problems. Recently, the company agreed to partner with China National Petrochemical Corporation to develop a field in central China that is expected to have five trillion cubic feet of natural gas. Other fields in which Chevron is heavily invested include the Blind Faith project in the Gulf of Mexico, the Agbami Deepwater Nigeria project, and the Gorgon Project off the west coast of Australia. The primary benefit of international exploration and production is that the company is shielded by production slowdowns in any one region, allowing for continued growth even when an area begins to mature. Another reason for the spread of Chevron across the world is that much of the world's oil originates from OPEC-controlled countries that block the entry of foreign oil companies. Because of this, companies like Chevron must continuously search for reserves in countries that will allow the company to invest and operate without major risk of nationalization and terrorism. The most recent example of this spread is the proliferation of drilling in Africa. While many African countries are less than stable, the continent has 8% and 10% of the world's proven gas and oil reserves, making it an especially important resource as we approach peak oil and supplies drop. Chevron’s vast production base is supported by a strong marketing network comprising 26,500 retail gas stations spread across 90 countries. Upstream exploration and production account for the largest share of Chevron's income (79 percent of net income in 2007) followed by downstream refining and marketing (19 percent of net income in 2007), while chemicals and other segments accounedt for less than 2 percent. 2007 was a great year for Chevron, with income increasing from 2006's $17.138 billion to $18.688 billion[4]. Most of this increase can be attributed to higher crude prices for oil driving margins growth; the oil refining industry saw shrinking margins in 2007 for the same reason, causing Chevron's downstream refining business to offset some of the upstream crude production profit. Chevron is also in the oil and gas transport business; on April 8th, 2008, it announced that it would build a pipeline, in partnership with ConocoPhillips and Exxon Mobil, that would span from the North Slope of Denali in Alaska through Canada and into the U.S. The total cost of the project is estimated at $20 billion, and will require over 1000 government permits in both countries, but the returns could be massive, as the gas shipped by the line has the potential to meet 8% of total U.S. gas demand[5]. [edit] Business DriversThe main drivers of revenue for the oil and energy sector include net proved reserves (volume in terms of barrels per day, or BPD), expansion in distribution network, presence across the supply chain (i.e., the company is involved in exploration, production, refining, and marketing, termed vertical integration), higher net productive wells (i.e., wells that currently produce oil), and operations across different geographies. The following table provides an overview of Chevron’s historical performance during 2004-06.
Economic growth is driving the demand for petroleum products across the globe and specifically in emerging markets, such as India and China. Most of the companies operating in this sector including Chevron are expanding operations in these markets to take advantage of this rise in demand. Chevron’s acquisition of Unocal in 2005 to gain access to the Asian markets was a step in this direction. Chevron has to bear significant costs in order to comply with a number of environmental laws related to storage, transportation, use, and discharge/disposal of products that contaminate the environment. This affects the profitability of the company, thus limiting its ability to expand operations (as the cost of expansion is high). Although Chevron’s major customer base lies in the U.S., the company has begun expanding in developing markets, such as China and India, as it is not possible to meet the demand in the U.S. with the existing capacity in the country. The cost of setting up new refineries in the U.S., along with the environmental restrictions in place, makes it difficult for companies to expand capacity there. This coupled with the increasing demand for petroleum in other parts of the world, is driving petroleum companies to expand their refining capacity in developing markets. [edit] Customer DemandThe demand for energy is closely linked to the overall economic growth of a country. Thus, companies operating in this sector including Chevron are vulnerable to a decline in the demand for energy and other related products as a result of an economic downturn in the country. Customers of Chevron primarily include power generating companies, marine industry, aviation industry, and chemical industry. As the demand from most of these consumer segments reduces during an economic downturn, it increases the risk faced by oil/energy companies such as Chevron. Changes in the prices of petroleum products also have a direct impact on the demand for Chevron’s products. A decline in oil prices (which may be caused by an increase in supply of oil) has a negative impact on the company’s revenues. [edit] Oil Prices Make Unpredictable LoversOil and gas prices have fluctuated heavily over the past few years, though the most recent trend is a rise in prices, with a barrel of oil trading in international market a day after the new year at just over $100. Because both are nonrenewable forms of energy (they will eventually run out), slowing discoveries of new sources combined with increasing pricing has led to speculation that production is approaching peak oil quantities. Whether this is true or not, oil and gas are commodities: one company's gas can only be differentiated from another company's gas based on price. While Chevron currently benefits from high prices, the profitability of the current market will drive increased exploration and production, which could eventually cause prices to fall and margins to drop. High oil prices are also a major reason for increasing oil exploration and production, and are driving companies to explore for black gold in places never before thought possible, like the depths of the ocean. Chevron is taking an active role in the deepwater market. Recently, it teamed up with MIT to develop new ultra-deepwater drilling technology, and on January 31st, the company completed its first successful appraisal well in the deepwater Big Foot field of the Gulf of Mexico. Including water, the depth of the well was 25,113 feet - over four miles[7]. Deepwater exploration is both costly, as increasing demand has pushed day-rates of oilfield services companies way up, and risky, as finding reserves becomes more difficult as one goes deeper. The rewards of deepwater exploration, however, could be tremendous: oil companies need to find new reserves to supplement the maturing ones, successful deepwater hits are often extremely rich in oil and gas, and deepwater Gulf properties are not subject to the political risks of reserves in developing nations. An example of deepwater rewards was seen in November 2007, when Brazilian oil company Petrobras discovered 5-8 billion barrels of oil equivalent in the deepwater Tupi field off the coast of Brazil[8]. Successful deepwater exploration and extraction could combine with high oil prices to be a tremendous boon to Chevron's business, though repeated failures in finding reserves would waste millions of dollars and drive margins down. High oil prices negatively affect the company's refining and marketing segment; since the company refines more crude than it produces, Chevron must purchase oil at market price. The higher the price, the higher the company's cost; in the second quarter of 2008, as oil prices soared to record levels, Chevron announced that it expected a $250 million loss in its refining segment.[9] [edit] Environmental ConcernsFossil fuels, though highly cost-efficient forms of energy, are heavy polluters when burned. Increasing environmental concern over environmental degradation and global climate change is fueling a consumer-driven push away from dirty forms of energy toward cleaner forms like wind energy and solar power. These concerns are also causing political movements, which are leading to increased regulation in the fossil fuels market. Government regulations like emissions caps, renewable energy subsidies, and carbon trading schemes all facilitate transitions away from dirty, nonrenewable fuels. Natural gas is being touted by a number of sources (few of them environmental advocates) as "the" alternative to oil and coal. While natural gas does burn more cleanly than either oil or coal, and releases fewer greenhouse gases than either, natural gas is still a carbon-emitter. The current international focus on slowing carbon emissions is very likely to slow the market for both oil and natural gas, hurting Chevron's fossil fuels business immensely. Chevron has been criticized for the environmental effects of its upstream operations. On April 2nd 2008, for example, a court expert in Ecuador proposed Chevron pay up to $16 billion for damages it did to the Amazon rainforest. Chevron is contesting the sum, calling the testimony "biased" and "unethical", though evidence has emerged that the court expert drew his conclusions using data obtained from Chevron itself. The company's downstream operations are no less controversial. On May 7th, 2008, for example, Chevron, Shell, ConocoPhillips, BP, Marathon Oil, Valero, and Sunoco agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether, an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon Mobil, along with five other companies named in the lawsuit, are not settling and will continue to contest. [edit] The Rise of Renewable EnergyThe rise of petroleum prices has been slowly countered by the increasing financial feasibility of alternative energy replacements for traditional oil products. Alternative energy is still some years off from widespread adoption; alternative energy challenges like low production volume, low of production efficiency, and lack of infrastructure (some new fuels require distribution infrastructure separate from existing oil pipelines) all have yet to be overcome. However, energy sources such as ethanol, solar or wind end up taking off, the negative impact on the oil and gas industry could be huge. Chevron is one of the few oil majors (BP and Total S.A. being the others) that has embraced the possibility of a renewable future, and is actively involved in pursuing alternative energy solutions. For example, the company announced on January 31st that it has completed phase one of a $70 million solar installation for the Contra Costa Community College District - the largest such installation at any institute of higher education in North America. By its completion, the solar installation will generate around four million kilowatt-hours of electricity per year, supplying enough power for half the campus's needs. Chevron is also in a group of investors that in May 2008 put $115 million into BrightSource Energy, firm specializing in utilities-scale solar thermal technology. [edit] Competitive LandscapeCompanies in the oil and energy sector operate and compete with each other in different areas, such as oil exploration and production, refining, and chemicals. Chevron faces direct competition from companies, such as Occidental Petroleum, Exxon Mobil, BP, Repsol YPF S.A., Saudi Aramco, and Royal Dutch Shell.
With the consolidation of the industry, competition is intensifying. Large oil and gas companies are joining hands to form entities, which can exercise control and financial power to outbid their rivals. The intended merger of China National Offshore Oil Corporation with ChevronTexaco and the successful merger of ConocoPhillips with Burlington in 2005 are indicative of this trend. The five largest companies in the industry have a global market share of 14 percent and more than half of the domestic oil production, refinery capacity, and retail gasoline market, which allows them to control oil prices. Chevron has also been increasingly relying on technological solutions in order to increase its operational efficiency. The company has developed a number of solutions to reduce the time required for certain manufacturing processes and has also tied up with Microsoft for technology support. Such operational efficiencies enable the company to reduce cost, increase profitability, and gain a competitive advantage over its rivals.
 ChevronTexaco2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] Global Oil Industry Operational Data
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