Chevron (NYSE:CVX), a domestic titan of the energy patch, reported spectacular earnings last week that contained important clues about the future direction of capital spending for upstream exploration. The level of spending by Chevron and others will help determine the depth of the economic cycle. (Learn more in The Ups and Downs of Investing in Cyclical Stocks.)

Capital Spending
Chevron kept its overall capital spending for 2009 at $22.8 billion, which was flat with the company's 2008 budget. Drilling a little deeper, we discover the capital spending components.

Chevron Planned 2009 Capital Spending Components

Segment Amount (billions) Percent
U.S. Upstream $3.6 15.8%
International Upstream $13.9 61.0%
U.S. Downstream $2 8.8%
International Downstream $2.3 10%
Chemicals & Other $1 4.4%
Total $22.8 100%

The company stated that a one-time payment related to an overseas project comprises 10% of its capital spending in 2009, making the actual capital program less than reported. About 76% of the $22.8 billion is alloted to upstream exploration and development of oil and natural gas projects. The majority of Chevron's upstream activity occurs internationally on projects in Nigeria, Angola, Brazil and others. For companies like Schlumberger (NYSE:SLB) and Halliburton (NYSE:HAL), which generate a high percentage of revenues outside of North America, this comes as welcome news.

Drilling deeper still, Chevron plans to spend $3.6 billion on the U.S. Upstream. While the company is correct in stating that overall spending for 2009 is flat with that of 2008, the company spent $5.5 billion in the U.S. Upstream in 2008. Thus, spending in this area has been cut substantially for 2009 and also falls below the $4.5 billion it spent in 2007.

Chevron did not disclose whether these cuts are concentrated on land or offshore, but the reductions do not bode well for land drillers like Patterson-UTI Energy (Nasdaq:PTEN). In its recent report on drilling activity for January 2009, Patterson-UTI stated that it operates 162 rigs in the U.S. and Canada - a sharp decline from the 213 rigs it operated in December 2008.

During the conference call, Chevron CEO Dave O'Reilly reported a slowing down of development in Colorado's Piceance Basin due to "onerous environmental regulations" and a tenuous pricing outlook in that area. (Conference calls give the average investor a chance to hear management respond to analysts' hard-hitting questions. Learn more in Conference Call Basics.)

IN PICTURES: 20 Tools For Building Up Your Portfolio

Production Growth

Chevron also suffered from a problem that has plagued most other large, integrated oil companies - lack of growth in production. In 2007, it produced 2.61 MBOED (million barrels of equivalent per day), compared to 2.53 MBOED in 2008. Some of the decline in production can be attributed to the impact of hurricanes in the Gulf of Mexico. However, the delay in start-ups of large projects and mandatory curtailments from foreign governments also were factors. Thus, the company is not considered to be in a major growth mode.

Bottom Line
Chevron's recent earnings report showed a slowing of production growth. The company's conference call confirmed the slowdown, with management reporting that the company would not meet its compound annual production growth estimates of 3% for 2005 to 2010. Although Chevron's capital spending in 2009 is flat with that of 2008, large declines in North American Upstream spending helps paint the growth picture - or lack thereof - for 2009.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!