UPDATE 6-Chevron opts to keep massive budget in bid to boost output

Fri Jan 31, 2014 5:53pm EST

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 
and other international energy companies, Chevron 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'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 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.
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