Why Chevron Is a Long-Term Winner in the Fossil Fuel Industry
Chevron Overview
When it comes to big oil, Chevron has long been known as one of the world’s biggest and most influential fossil fuel companies. Chevron is a multinational oil and gas corporation that works on both upstream and downstream fossil fuel production activities. With upstream and downstream ventures, Chevron has become one of the world’s most well-diversified fossil fuel companies. Companies with operations that cover a wide range of diversified oil and gas production activities are known as integrated oil and gas companies. Since it was founded in 1879 as the Pacific Coast Oil Company, Chevron has progressively grown into an oil and gas conglomerate that controls a wide variety of production, refining, transportation, and marketing aspects within the fossil fuel industry. Because of this diverse array of operations, Chevron still appears to be a long-term winner in the fossil fuel industry, even as oil prices have plummeted and the demand for energy has collapsed.
The Road to Success
After the Pacific Coast Oil Company was bought by Standard Oil Company in 1900, it would take 84 more years for the company to be renamed Chevron. In 2001, Chevron merged with Texaco in a deal worth $45 billion. Following this merger, Chevron became the fourth-biggest publicly traded oil company, and also the second-biggest oil company in America. In 2013, Chevron’s total revenue topped earnings from Warren Buffett’s Berkshire Hathaway, General Motors, and Apple, with only Wal-Mart and Exxon Mobil beating Chevron. Chevron has reported that it controls 11 billion barrels of oil and natural gas reserves and has the capacity to produce up to 2.6 million barrels of oil per day (White, 2014). Moreover, Chevron also refines about 1.9 million barrels of oil per day and owns 25,700 gas stations throughout the world under the brand names of CalTex, Chevron, and Texaco (White, 2014).
Chevron is involved with many aspects of the fossil fuel industry. In addition to being a company that develops and explores for natural gas and crude oil, Chevron also transports and processes liquified natural gas, operates sophisticated gas-to-liquids processing plants, and works to refine, manufacture, and market petrochemical products. Chevron also makes plastics, lubricant additives, and industrial fuels. This fossil fuel giant also operates and maintains one of the biggest fossil fuel transportation systems in the world, with a fleet of pipelines, railroad cars, marine oil tankers, and countless trucks. While Chevron is headquartered in San Ramon, California, the company operates all across the Americas, Europe, Asia, Africa, and Australia. One of Chevron’s greatest strengths is its geographic presence. With operations taking place all over the world, Chevron has become one of the most well-known brands in history, which had helped the company achieve a competitive advantage over some of its rivals.
Stability Amid Panic
Chevron has remained relatively stable amid the coronavirus-initiated collapse in the oil and gas market when compared with other oil and gas companies. Its deeply integrated operations have served as a mitigating factor that has prevented a total collapse for Chevron’s shareholders. While Exxon Mobil is also known as an integrated oil company, this oil giant has faired far worse than Chevron because of mounting debt and a wide array of other financial challenges. Between July 2016 and March 2020, Exxon Mobil’s share price has collapsed by over 65 percent. During the same timeframe, Chevron’s share price fell by just above 40 percent, which is still a large decline, but not nearly as dramatic as Exxon Mobil’s fall. Moreover, Chevron has also been much quicker to rebound from the coronavirus struggles. Between March and May of 2020, Chevron’s stock climbed by 64 percent. Conversely, Exxon Mobil’s stock only rose by 34 percent.
Chevron Is Beating Exxon Mobil
What are the factors that have made Chevron much more desirable for investors than Exxon Mobil? While both of these companies are known to have very integrated and diverse oil and gas operations, their spending habits vary significantly. Exxon Mobil’s dramatic collapse has been more devastating for shareholders because of the company’s risky set of investments. For example, during the height of the coronavirus pandemic, Exxon Mobil continued to pump billions of dollars into a massive oil production bet in Guyana, which is a relatively small South American country wedged in between Suriname and Venezuela. Exxon Mobil has been employing a counter-cyclical strategy to invest $35 billion annually into future projects. Chief Executive Officer Darren Woods has remained confident that Exxon Mobil’s strategy will pay off in the long run. However, initiatives to pump funding into the current low-priced environment has made investors increasingly worried about the company’s mounting debt.
In comparison to Exxon Mobil’s counter-cyclical investing strategy, Chevron has employed a much more conservative approach to the downturn in global oil prices. Rather than continuing to pump money into future projects, Chevron has been tightening its budget with a series of spending cuts. This strategy has helped Chevron avoid large increases in debt, while also easing investor worries about escalating levels of financial risk. As a result of Chevron’s conservative moves, the company’s first-quarter profits in 2020 rose by 38 percent to $3.6 billion (Egan, 2020). On the other hand, when Exxon Mobil revealed its first quarter financial results, investors were shocked to see the company post its first quarterly decline in revenue since its 1999 mega merger with Mobil. During the first three months of the year, Exxon Mobil lost $610 million as a result of the collapse in oil prices and continued spending on future oil-related projects around the world.
Financial Strategy
Chevron’s Chief Executive Officer Mike Wirth has been committed to sticking with a strategy characterized by financial discipline, which represents a completely different approach than has been taken by Exxon Mobil. While Chevron is weathering the oil price storm better than Exxon Mobil, neither company has been doing particularly well in comparison with the rest of the global economy. Investors have been broadly fleeing the energy sector throughout the coronavirus pandemic. Energy stocks now only make up 3.8 percent of the stock market’s S&P 500 Index, when they used to account for 16 percent of the same index back in 2008 (Crowley, 2020). Pressure from environmental interests, negative oil prices, and general economic uncertainly has created a challenging environment for all of the global fossil fuel companies. After posting abysmal first quarter profit results, Exxon Mobil has now stepped back from its ambitious spending plans with an announcement to cut total 2020 spending by 30 percent (Egan, 2020).
According to Boston-based hedge fund manager Mark Stoeckle, the energy market as a whole has destroyed value for investors throughout the past decade (Crowley, 2020). In an attempt to persuade investors to stick with the stock, Chevron’s Mike Wirth has continued to reaffirm plans to cut costs, increase operational efficiency, and buy back shares through a process known as commodity cycles. One area where Chevron has taken a significant hit has been within its shale oil business. When compared to Exxon Mobil, Chevron has much more exposure to the U.S. shale oil industry, which has been hammered harder than any other sector of the fossil fuel industry. Prior to the start of the oil supply glut of 2014 through 2016, Chevron had turned a tremendous profit from its expansion into shale oil production.
Anadarko Petroleum Bid
After Chevron first started to reel in profits from shale oil production, the company explored numerous opportunities to buy out rival shale oil producers in an attempt to solidify its market share over the shale oil industry. One of its highest profile takeover attempts occurred with the former Anadarko Petroleum Corporation. Chevron placed a bid of $38 billion for Anadarko Petroleum, but ultimately backed out of the deal, which hit the company with a massive $1 billion breakup fee (DiChristopher, 2019). Instead of engaging in a bidding war to take over Anadarko Petroleum, Chevron walked away in an effort to prioritize shareholder returns and financial discipline. Many energy analysts have commended Chevron from backing out of this deal, even with the significant $1 billion penalty. Anadarko Petroleum was ultimately purchased by Occidental Petroleum with the backing of a $10 billion investment from Warren Buffet. Since Occidental Petroleum took over Anadarko Petroleum, the company’s stock has plummeted nearly 90 percent from its 2018 highs.
Opportunities and Strengths
Chevron manages a wide range of services and business all around the world. As a fully integrated fossil fuel company, Chevron has achieved a commanding presence with its chemical operations, oil and gas exploration services, and power generation capabilities. This wide range of capabilities and services has helped Chevron improve its profitability position over the years. Prior to the collapse of the global energy industry as a result of the coronavirus outbreak, Chevron had been achieving progressively stronger quarterly earnings. Between fiscal year 2017 and fiscal year 2018, Chevron increased its operating margin from 3.9 percent to 9.7 percent (Market Line, 2019). Chevron’s efforts to manage costs and improve operational efficiencies had been paying off tremendously. Improving profitability gave Chevron an edge in terms of increasing shareholder confidence. While all fossil fuel companies have experienced a tremendous amount of pressure from 2020’s economic lockdown, Chevron looks poised to bounce back once the global economy starts to rebound.
There are numerous opportunities for Chevron to continue to increase profitability in the future. As the demand for liquid fuels stabilizes, Chevron is well positioned to take advantage of rising consumer confidence with its businesses related to the sale of diesel, gasoline, and jet fuel. The U.S. Energy Information Administration’s Short-Term Energy Outlook of 2019 reported that consumption of all liquid hydrocarbon fuels would rise from 2018 through 2020, with jet fuel making the biggest gains. Now that coronavirus has toppled these estimates, some analysts say that Chevron’s best bet for the near future may lie in the natural gas market.
Natural Gas and Renewables
The U.S. Energy Information Administration has consistently labeled natural gas as one of the most important energy sources for America’s future. As states continue to move away from dirtier fuel sources like coal and heating oil, natural gas providers may reap the benefits of increasing demand. Moreover, even if the economy only sustains a lackluster rebound in the near future, natural gas will continue to be essential for home heating and cooking. Americans won’t stop heating or cooking with natural gas just because the economy is in a recession. In fact, given the cost savings often associated with switching over to natural gas, an economic downturn may compel more homeowners to make the switch to gas.
While Chevron may benefit from increasing its exposure to natural gas, the company has yet to make a move into the renewable energy industry. Chevron and other multinational oil and gas companies have made commitments to reduce greenhouse gas emissions. However, unlike some of Chevron’s rivals, the company has not started to dedicate resources towards renewable energy generation or research. Instead, top Chevron officials say that the company is continuing to move forward with investments in low-carbon technologies to reduce emissions from its current oil and gas operations. As renewables continue to gain traction in the energy market, Chevron may be poised to take the renewable energy plunge in the near future.
Sources
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DiChristopher, T. (2019). “Chevron, the loser in the Anadarko buyout battle, is actually a winner on Wall Street.” CNBC.
Egan, M. (2020). “Exxon posts its first loss in decades, and Chevron slashes spending.” CNN.
Kramer, L. (2020). “Upstream vs. Downstream Oil & Gas Operations: What’s the Difference?” Investopedia.
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Siegel, J. (2020). “US oil giant Chevron takes ‘long-ball’ approach to climate change in pivot to clean energy.” The Washington Examiner.
Spetalnick, M., et al. (2020). “Chevron barred from drilling, transporting oil in Venezuela: U.S official.” Reuters.
White, R. (2014). “Chevron is still going strong after 135 years.” Los Angeles Times.
