Eye-Popping Chevron '08 Capex Signals Bullish Outlook

HOUSTON Dec 14, 2007 (Dow Jones Newswires)

While all the oil majors have been raising their capital budgets in recent years, the most dramatic mover has been Chevron Corp. (CVX), which spent $8.3 billion in 2004.

The California company last week announced it would spend $22.9 billion next year, up 15% from this year's level.

The increase, company officials note, reflects that Chevron has hit the spending phase of a multi-year campaign to build capacity. Chevron now has about 30 projects of $1 billion or more under development, whereas five years ago it had fewer than 10 that size. In 2008, Chevron expects major new production to come on line from the Gulf of Mexico, Nigeria and Kazakhstan that will enable the company to average 3% long-term annual production growth.

But Chevron's spending ramp-up - a more extreme version of an industry-wide trend - also is a sign of the company's comparatively bullish outlook for commodity prices, analysts said. That philosophy marks an extension of the outlook that led Chevron to spend $17.5 billion to acquire Unocal Corp. in 2005, when energy prices were above historic norms - but below today's levels.

While declining to disclose Chevron's long-term price assumptions, Chevron Chief Economist Edgard Habib expressed confidence in the second-largest U.S. oil company's ability to fund a 2008 capital budget that he concedes is "hefty." "I can tell you Chevron is confident of its ability to exercise this budget," Habib said Wednesday on the sidelines of a Houston energy conference. "There is a lot of confidence behind it."

Although energy companies are flush with cash amid a multi-year energy boom, cost-inflation has emerged as a major factor in the industry-wide push to add capacity. Expenses have skyrocketed on strong demand for the steel, equipment and laborers needed for the fields. Costs to produce oil and gas are up 67% since 2000, and 30% in the past year alone, according to consultant Cambridge Energy Research Associates.

Chevron's decision to keep its foot on the spending accelerator implies a lofty outlook for prices, analysts said. It is also a further sign of Big Oil's gradual tilt towards an emphasis on production growth, after a long era that preached capital discipline above all else.

"They think they can make up for increasing costs once they have the production going," said Daniel Katzenberg, an analyst at Oppenheimer & Co.

Shifting Continuum On Growth Vs Capital Discipline

Some analysts have expressed skepticism in the past about Chevron's long-term volume growth forecasts amid some delays to major projects in recent years. But the market essentially endorsed Chevron's capital spending announcement, bidding up shares in tandem with most oil stocks after the news was announced last Thursday. Credit Suisse, which has rolled its eyes at some prior growth forecasts by the company as it has boosted spending, characterized the budget as realistic.

"Chevron is pushing to make sure it can deliver upstream volume growth, and has decided to spend to make sure it happens," Credit Suisse analyst Mark Flannery said in a research note. "The previous level of spending was starting to look inadequate, as it is at many other upstream companies."

Chevron's aggressive spending is principally aimed at improving its production growth rate. Chevron's production for 2007 is expected to be flat or slightly down from the 2006 level, but Philip Weiss, an energy analyst at Argus Research in New York, said 2008 will mark a turning point for Chevron.

"We forecast that its production should start to meaningfully increase - approximately 6% year-over-year - allowing it to achieve its longer-term production growth target of more than 3%, even after lackluster growth in 2006 and 2007," Weiss wrote in a recent note to clients.

After more than three years of ever-stronger commodity prices, most leading energy companies are in healthy financial condition. In Chevron's case, the energy boom has translated into a debt-to-capital ratio of just 13% at the end of the third quarter, and its continued hold of a double-A credit rating - the second-best level - with major ratings agencies.

But Chevron, like its peers, faces persistent challenges with keeping major projects on schedule. In October, the company said its Tahiti oil field in the Gulf of Mexico would begin production by the third quarter of 2009, a 12-month delay from its original start date. Chevron has said the project will cost more due to the delay but hasn't said by how much, a company spokesman said.

Even though Chevron is smaller than Exxon Mobil Corp. (XOM) and BP PLC (BP), its 2008 capital budget of $22.9 billion is well above the level of either of those companies in recent years. The $22.9 billion budget also dwarfs that of U.S. No. 3 oil company ConocoPhillips (COP), which last week announced a 2008 capital program of $15.3 billion, a 13% increase from the 2007 level. In February, Royal Dutch Shell (RDSB) said it would spend $22 billion-$23 billion in 2007 compared with $21 billion in 2006.

To help manage its growth, Chevron recently reorganized its senior management structure, tapping John Watson as the new executive vice president of strategy and planning. Watson's duties will include overseeing the execution of major capital projects. Watson, who will report directly to Chief Executive David O'Reilly, is to start at the position in January.

"The move was designed to enhance relationships and project stewardship," said Chevron spokesman Don Campbell. "But it also reflected the growth of the company over the past 15 years."

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