CHEVRON: BOUNCING BACK
In 2016, Chevron posted its first annual loss in 37 years. This year, solid results in the first and second quarter saw the oil and gas giant rebound strongly into profit, while predicted production growth as Gorgon ramps up and Wheatstone comes online wi
CHEVRON shares received a boost after the oil and gas giant beat market expectations with earnings of $US1.5 billion for second quarter of 2017, compared with a loss of $US1.5 billion in same period last year.
Q2 production of 2.78 million barrels a day (BOE/D) represented a 252,000 BOE/D, or 10 per cent, increase over Q2 2016.
Major capital projects increased production by 265,000 BOE/D as multiple projects ramped up, including Gorgon.
“Second quarter results improved substantially from a year ago and year-to-date net cash flow is positive,” Chevron chairman and chief executive John Watson said in the company’s June quarter report.
“We’re delivering higher production with lower capital and operating expenditures,” he said.
“Oil and gas production was up 10 percent in the second quarter from a year ago.
“Our Gorgon LNG Project in Australia closed the quarter running above nameplate capacity and we had record production from our shale and tight resource in the Permian Basin.
“First production from the Wheatstone LNG Project is expected next month.”
Looking ahead to the second half of the year, Chevron expected to see reliable production from the assets that are currently on stream and further growth in the Permian and with Wheatstone coming online.
Chevron chief financial officer Patricia E. Yarrington used the Q2 earnings call to spruik the company’s capital efficiency initiatives and debt reduction drive.
“At quarter-end, debt balances stood at approximately $43 billion, more than $3 billion lower than where we began the year,” Ms Yarrington said.
“We continued to reduce our spend by finishing our major capital projects under construction and driving capital efficiency gains throughout our investment queue.”
Looking ahead to the second half of the year, Ms Yarrington expected cash outcomes to favorably reflect growing production and additional proceeds from asset sales.
Despite “some anticipated unevenness between third quarter and fourth quarter, for example related to the precise timing of sales transactions” Chevron expected to end the year in a cash balance position at current prices.
“We're seeing strong performance at Gorgon,” Chevron executive vice president Upstream James W. Johnson told analysts during the Q2 earnings call.
“All three trains have achieved or exceeded nameplate capacity and are operating smoothly.”
Gorgon production was 333,000 BOE/D (on a 100 per cent basis), and by late July was averaging around 430,000 BOE/D. 88 LNG cargoes had been shipped by mid-year.
Mr Johnson said that the Train 3 start-up was a particularly “beautiful thing”.
“So now all three trains are stable at or above nameplate. And that was our goal. When we look at the reliability, it’s how many trips or how many times does the plant go offline, and obviously we want to eliminate those so that the plants run reliably day in and day out,” Mr Johnson said.
“Looking forward, we're focused on achieving sustained operations and are analyzing plant performance to find opportunities to increase reliability and production.
“Additional fine tuning of the plant will maximize efficiency and we expect further debottlenecking opportunities to increase plant capacity.”
Plant performance data was being used to identify and correct any bottlenecks towards increasing ultimate plant capacity.
“So on balance, I expect to see us running at these levels throughout the year,” Mr Johnson said.
“There may be times we'll take short pit stops but those would be planned in advance and they'll be driven by economics.”
Chevron was also on track for first production at Wheatstone, with the platform and pipeline operational and supplying natural gas to the inlet of the onshore LNG plant.
Mr Johnson said that early well performance was encouraging.
“We're in the process of starting up the plant and expect to commence cool-down shortly.
“LNG production is expected to follow [in August]. Train 2 construction is progressing well and we're on track to start up six to eight months after Train 1,” he said.
With no construction and commissioning largely complete, Train 1 had now moved into the true start-up phase.
Train 2 was still are in bulk construction mode, but Chevron expected that to wind down in the fourth quarter on the year.
“A this point in time, really don't see any particular obstacles or challenges in our path to getting Train 2 complete and getting into the commissioning and start-up,” Mr Johnson said.
“There's always the issues of moving from bulk construction into the sequence of commissioning but we've got teams all over that.
“And just as we saw at Gorgon, as we move from Trains 1, 2 and 3, we expect to see continuing efficiency both in the final construction and in that transition to commissioning building on the experience of the first train.”
In its first half conference call, project partner Woodside confirmed that LNG Train 1 was well advanced and nearing completion.
“Our expectation is we're targeting first cargoes in September,” Woodside chief executive Peter Coleman said.
“The question will be just how quickly the plant can ramp up and maintain reliability for us, but it's pretty clear as a joint venture we're targeting first cargo in September.”
ATO bites back
On April 21, 2017, the Federal Court of Australia upheld a judgment pursued by the ATO regarding the interest rate applied on certain Chevron intercompany loans – a decision which would see the US oil and gas giant face a $300m tax bill, plus substantial costs.
After applying for special leave for the matter to be heard by the High Court in May, Chevron had a change of heart, announcing on 15 August that it had reached a confidential settlement with the ATO.
In the short statement, Chevron stated that “the agreed terms are a reasonable resolution of the matter” which were “not expected to have a material impact on the year to date results of the company”.
Revenue and Financial Services minister Kelly O’Dwyer said the ATO’s initial estimates are that the Chevron decision would bring in more than $10bn dollars of additional revenue over the next ten years in relation to transfer pricing of related party financing alone.
“We have already provided an additional $679 million funding to the ATO through the Tax Avoidance Taskforce to strengthen the ATO’s capabilities and ensure these multinational companies operating in Australia are held to account,” Ms Dwyer said.
“The Taskforce is estimated to generate $3.7bn from 2016-17 to 2019-20.”
“At quarter-end, debt balances stood at approximately $43 billion, more than $3 billion lower than where we began the year.”
“I do think 2017 is a transition year,” Ms Yarrington said during the Q2 earnings call.
“And I think we are very much at a point of inflection as we get through this year in terms of higher cash generation from the assets that are online; higher margin-accretive production; lower operating expenses; as well as lower C&E outlays and greater flexibility around the capital program altogether.
“So I think it is very much a transition year and an inflection year.”
On a macro level, industry reports and medium term predictions were mixed.
While action to address unsustainable gas prices on the east coast of Australia had yet to bring prices down to affordable levels, other large producers joined Chevron in enjoying increased net profits on the improved performance of international oil and LNG prices.
September data showed that spot cargo prices for Japan – the world’s largest consumer – hit a five month high in August.
The International Energy Agency in its June medium-term gas outlook that the global LNG glut would persist through the end of 2022.
Paris-based industry group Cedigaz predicted the imbalance to persist until 2023 or even 2024 as total LNG production capacity increased by an estimated 60 per cent to 387 million mt/year by 2021.
“Demand will struggle to keep up with supply ramp-up and an oversupply situation should prevail," the group said.
Yet as buyers increase their use of the fuel at a staggering pace, the long term news was good for suppliers.
A supply-demand gap could open up post-2024, unless new LNG production plants begin operations, according to Cedigaz.
Wheatstone platform and pipeline are operational and ready to supply natural gas to the onshore LNG plant.
Key milestones continue to be achieved at Wheatstone with first cargo targeted for September.
88 cargoes of LNG had been shipped from the Gorgon Project by mid-year.