Chevron to Trim Downstream Biz - Analyst Blog

At a meeting with financial analysts in New York , U.S. energy behemoth Chevron Corp. (CVX) unveiled its business strategy. In particular, the company outlined plans to restructure its struggling downstream (refinery, marketing, and transportation) operation that has seen mounting losses due to weak demand for fuel. Chevron will now focus on growth in Asian markets and in its gas business.

The company confirmed its 2010 capital expenditure budget of $21.6 billion, 2.7% lower than a year ago. In an effort to improve efficiency and simplify the organization, Chevron is aiming to cut refinery capital expenditures by 23% this year.

Highlights of the meeting are summarized below:

Job Cuts

The integrated major said that it plans to cut 2,000 jobs (12% of its downstream staff and 3% of its worldwide staff) this year as part of an effort to realize savings in its refining operations. In recent times, Chevron’s downstream results have been sharply lower, adversely affected by depressed refining margins. The company expects the bearish downstream environment (sluggish demand and surplus capacity) to persist well beyond 2010.

Chevron will incur around $150 – $200 million in after-tax severance charges during the first quarter of 2010, with more to follow, as staff reductions continue through 2011. In 2009, the firm slashed 1,900 jobs worldwide, in the process cutting operating expenses by 15%, or $3.9 billion.

Asset Sale

Chevron further said that it will put some of its downstream operations up for sale, including the 210,000 barrels per day Pembroke refinery in Wales, U.K., and fuels marketing, aviation and lubricants businesses in the Caribbean and some markets in Central America.

The company will also review operations in Hawaii and Africa (outside of South Africa). However, Chevron did not expect to close any refineries, unlike French oil major Total SA (TOT) that announced the shut down of refining operations at its plant in Dunkirk, France, in response to falling demand.

Ultimately, Chevron plans to trim its refining business’ presence to 40 markets, versus 93 last year, and own 1,900 filling stations, down from 3,200 in 2009.

Upstream Focus

Underscoring the dim prospects of the downstream business, Chevron has decided to concentrate on natural gas and Asian assets. The second-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) also said that it expects its annual production to increase 1% through 2014 and by 4 – 5% in the three years after that, driven by two big Australian gas projects (Gorgon and Wheatstone).

Over the next three years, Chevron is looking to approve or start 25 new upstream projects with an investment of at least $1 billion.

Like its rivals, Chevron sees natural gas playing an important part in its future. Already, the company’s liquid reserves have fallen to 62% of its total in 2009, down from 66% a year before. Chevron said that it expects natural gas to represent 41% of total volumes by 2017, up from the current share of 31%.

Our Take

In view of the increasingly bearish outlook for the marketing and refining operations, we believe that Chevron has taken the right decision by looking to streamline its loss-making downstream portfolio, a plan that has been followed by several other oil majors, including Royal Dutch Shell PLC (RDS.A) and ConocoPhillips (COP).

The company plans to boost returns and remain competitive in this difficult environment by embarking on aggressive cost reduction initiatives, exiting unprofitable markets, and streamlining the organization. As of now, Chevron has decided to boost focus on the more lucrative and well performing ‘upstream’ exploration and production end of the business (mainly natural gas and Asia), both at home and abroad.

Company Overview

San Ramon, California-based Chevron is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals and other energy-related businesses.