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.)
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
|Chemicals & Other||$1||4.4%|
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
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.
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.
Stock AnalysisA summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
Options & FuturesInvesting during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
EconomicsWill remaining calm and staying long present significant risks to your investment health?
Stock AnalysisIs DKS a bargain here?
Investing NewsA third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
Stock AnalysisHome Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
Stock AnalysisYelp investors have had reason to be happy recently. Will the good spirits last?
Stock AnalysisWalmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
Stock AnalysisAs a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
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 >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
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 >>
The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>