Chevron Recommits to Reserves, Production Growth

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Chevron will likely see its profits fall from last year’s heights amid lower oil and gas prices, but the US major sees plenty of growth elsewhere in its future.

The company’s brand of “higher returns, lower carbon” investment remains in place, with spending on low-carbon areas such as biofuels, carbon capture and hydrogen set to rise in the coming years. But management made clear during Chevron’s fourth-quarter earnings call Friday that oil and gas will retain its primary focus for the foreseeable future, given still-recovering demand for hydrocarbons.

That means Chevron is comfortable growing both its oil and gas production and reserves going forward.

In fact, management emphasized to analysts that the company will likely exceed its 3% compound annual growth rate over the next five years while also fully replacing depleted reserves.

“Growth matters when it’s profitable,” said CEO Mike Wirth. Given its plans, Chevron clearly anticipates multiple years of profitable growth ahead.

Reserves Still Matter

International oil companies’ shift toward prioritizing value over volume made full reserves replacement a lower corporate priority even before energy transition strategies gained prominence in recent years. But while Chevron is by no means loosening its value-versus-volume commitment, the US major is not planning on becoming a shrinking oil and gas company anytime soon.

“We intend to be in this business for quite a while, and 100% [reserves replacement] is a number that you ought to expect to see — that or greater — over time,” Wirth told analysts.

The company’s reserves replacement ratio (RRR) officially clocked in at 97% for 2022, but management said higher prices forced a 100 million barrel reduction to its bookable reserves under its contract terms in Kazakhstan. Excluding that impact, Chevron’s RRR would have tallied 107% thanks to reserves additions in Israel, Canada, the US Gulf of Mexico and US Permian Basin.

Moving forward, the firm expects to continue booking reserves from the Permian on a rolling basis as US accounting rules allow. Exploration should also restock the queue.

Here, Chevron is particularly keen on the East Mediterranean.

The company is already in discussions with partners Eni and Tharwa Petroleum on appraisal and development concepts that could follow their “significant” Nargis gas discovery off Egypt. Chevron is also advancing exploration plans for several blocks farther west, based off recent seismic work.

Wirth also cited the major’s recent license addition near TotalEnergies’ closely watched Namibia discovery, as well as its deep acreage portfolio in the US Gulf. Chevron is also “still working” on evaluating the Shell-operated Block 42 off Suriname, where a well last year found a working petroleum system but results appear to have been underwhelming.

“We’ve got a nice portfolio that we like,” Wirth said.

Chevron’s commitment to continual reserves replacement is sure to draw the ire of climate advocates aspiring to the goals of the International Energy Agency’s Net-Zero by 2050 report, which said that no additional oil and gas reserves are needed if the world were to achieve this scenario.

Oil and gas firms have countered that the world is not on this trajectory, and thus reserves additions are still needed — at minimum, to offset natural declines.

Chevron’s proved reserves life stands at 10.2 years, based on 2022 production levels.

Production Upside?

The company’s production of 3 million barrels of oil equivalent per day last year fell shy of guidance, but Chevron insisted it was “in line” if the effects of higher prices under some of its production agreements were stripped out. Non-adjusted output was down roughly 100,000 boe/d versus 2021.

For 2023, the major expects it can at least hold output flat — or it could grow by up to 3%, assuming $80 per barrel Brent.

Despite the potential for another year of effectively unchanged production, management repeatedly emphasized expectations that Chevron could exceed its multiyear 3% growth guidance on a compound basis.

What they didn’t detail is how exactly that might take shape.

Questions around the feasibility of that target are heightened by the fact that Chevron’s growth rate in the Permian — its primary near-term growth driver — is slowing.

Full-year output grew by a formidable 16% in 2022, to 707,000 boe/d, but sequential growth last year averaged a more modest 2%.

Chevron has described its shift from a development program dependent on drilled-but-uncompleted wells toward more drilling, as well as changes to its well spacing and target depths and zones, as slowing its pace and leading to “a little bit lower” growth profile in 2023 relative to last year.

Significant growth is still expected, but Chevron’s 1 million boe/d by 2025 guidance may be due for a course correction at its upcoming Feb. 28 strategy update.

“We remain focused on returns and value, not on production,” Wirth said.

Notably, the company’s mid-decade figure was not cited during the call. Analysts will no doubt pry into that more next month.

Chevron Q3 Earnings
($ million)Q4'22Q4'21%Chg.Q3'22
Operating Cash Flow12,5009,5003215,300
Net Income6,3785,0822611,231
Adjusted Income7,8504,9176010,784
Upstream 5,4855,15569,307
Downstream 1171760542,530
Corporate and Other-903-860---606
Liquids Production ('000 b/d)1,7471,828-41,707
Gas Production (MMcf/d)7,5887,736-27,920
Oil and Gas Output ('000 boe/d)3,0113,117-33,027
Refinery Throughput ('000 b/d)1,5411,48441,430
Products Sales ('000 b/d)$2,6772,4838%$2685

Earnings, Corporate Strategy , Exploration, Shale, Majors
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