Caution Is the Watchword for New Chevron Chief
WHY YOU SHOULD CARE
Because the oil giant wants to thrive even with low oil prices.
Michael Wirth, Chevron’s new chief executive, has said the company plans to maintain a tight grip on capital spending, despite the surge in oil prices over the past year and warnings that they could rise even higher over the next few years.
In an interview, Wirth, who took up his post in February, says he wants Chevron to be able to cover its dividend from its free cash flow at an oil price of $50 a barrel, well below today’s level of about $70 a barrel for Brent crude.
He stresses the importance of controlling costs, sticking to capital spending budgets and generating cash to pay the dividend, rather than pursuing every possible opportunity for growth.
“We have increased our dividend payment for 31 consecutive years,” he says. “Our shareholders know that, and they value that.”
The slump in oil investment since prices collapsed in 2014 has prompted a swelling chorus of warnings from analysts and executives that world crude production growth could fail to keep pace with demand, leading to shortages and soaring prices in the next decade.
Wirth acknowledges that is possible. “Welcome to the oil business: It’s what it’s always been,” he says. “Prices are hard to predict: It’s a commodity market.”
However, he adds, his aim is “to win in any environment,” and he still has work to do to make Chevron more competitive at times of low prices.
“We’ll see prices higher than they are today, and we’ll see prices lower than they were in the past. … And we have to have a portfolio that’s resilient,” he says. “We’ve proven we can survive at $50. The challenge to our organization is how do you thrive at $50?”
Like his peers Darren Woods at ExxonMobil and Ben van Beurden at Royal Dutch Shell, Wirth spent his career mostly in the group’s “downstream” operations, in supply, trading and chemicals, rather than in oil and gas production, before he was chosen last year to succeed John Watson as chief executive.
Costs always matter, capital discipline always matters. Safety and execution and reliability always matter.
Michael Wirth, CEO, Chevron
Those downstream businesses typically reward a parsimonious and careful management style rather than ambition and risk-taking, and Wirth accepts that background has influenced his approach.
“Costs always matter, capital discipline always matters. Safety and execution and reliability always matter,” he says.
There is evidence of that thinking in the contrast in capital spending strategies between Chevron and its U.S. rival Exxon. Exxon is planning a steady increase in capex and exploration spending, from $23.1 billion last year to $28 billion next year and about $30 billion a year from 2023.
Wirth, by contrast, plans to spend about $18 billion to $20 billion a year out to 2020, a slight tightening from Watson’s planned investment of $17 billion to $22 billion a year.
“We’ve indicated we’re going to keep capital spending flat. We’re in a higher price environment, [but] we haven’t changed our capital budget, and I don’t expect that we will,” Wirth says. “We will not fund every project. We will have projects that meet our economic hurdles, but we’ll choose not to fund, because we’ll have better options.”
Paul Sankey, an analyst at Mizuho, commented last month that Chevron was in “a multi-year sweet spot,” with its production volumes rising at an average of about 6 percent every year to 2020 thanks to the company’s heavy investment earlier in the decade, even though it had now cut capital spending sharply.
That growth rate is high for a large international oil company, and compared favorably to Exxon, which was being forced to increase capital spending “to offset struggling volumes,” Sankey says.
Wirth’s priorities for spending include the $37 billion expansion at the giant Tengiz oilfield in Kazakhstan, and rapid growth in the Permian Basin of Texas and New Mexico, an area where Chevron has for decades owned land and that has in recent years turned into the white-hot center of the U.S. shale oil boom.
Chevron had a slow start in shale. As Wirth admits, the running was made by small and mid-sized companies that were leaner and nimbler, with lower costs and faster rates of innovation. But he argues that Chevron has now caught up, and its size is becoming a strength rather than a weakness.
Its production in the Permian Basin at the end of last year was 200,000 barrels of oil equivalent a day (boe/d). By the end of March, it had risen by a quarter, to about 250,000 boe/d.
“The shale game is becoming a scale game,” Wirth says. “We’re in a factory drilling mode now, where we’re drilling hundreds of wells. And that is all about factory-type efficiencies. Small improvements in things that you repeat many times become big improvements.”
The result of those improvements, he adds, was that “a well in the Permian Basin is more economic than anything else we can do,” with rates of return of more than 30 percent even with oil prices below today’s levels. While the business is growing, it still needs financing from the group, but Wirth expects it to be generating cash by 2020.
Frontier-type projects, the riskier investments, are now … not as necessary.
His expectations of the long-term strength of U.S. shale underpin his emphasis on the need to be careful about investment decisions. Oil developments that have significantly higher costs than U.S. shale will struggle to be viable.
“Frontier-type projects, the riskier investments, are now … not as necessary,” he says. “And I think that has implications for everyone.”
For Chevron, that meant every project it invested in would have to be “best in class,” he says. “It can’t just be the kind of project you might have funded historically, because we’ve got better options.”
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