Chevron Corp. (CVX), the U.S. oil giant facing its longest slide in energy output in four years, could tap record cash to reignite growth by acquiring Cobalt International Energy Inc. (CIE) or Kosmos Energy Ltd. (KOS)
Oil and natural gas production from Chevron’s wells during the third quarter dwindled to the lowest since 2008, slashing profit by one-third and adding to declines that had already forced the world’s fourth-largest energy company to abandon its full-year output target. Even after the earnings drop, Chevron’s cash stood at an all-time high of $21.3 billion, exceeding that of bigger rivals Exxon (XOM) Mobil Corp. and Royal Dutch Shell Plc (RDSA), according to data compiled by Bloomberg.
While Chevron is spending more than $45 billion to harvest Australian natural gas fields that will produce enough of the fuel to supply all of China’s gas-import terminals, Phoenix Partners Group LP says the company still has ample resources to expand into nascent oil-exploration regions. Cobalt’s billion- barrel discovery off the coast of Angola could bolster Chevron’s deep-water African reserves, and Kosmos and Ophir Energy Plc (OPHR) control “significant” untapped deposits from Tanzania to Morocco, according to Tudor Pickering Holt & Co.
“Chevron is going to have to grow through acquisitions,” Chris Kettenmann, chief energy strategist at Phoenix Partners in New York, said in a telephone interview. “They are going to have to come to the market because they haven’t returned the $21 billion on the balance sheet to shareholders.”
Lloyd Avram, a Chevron spokesman, said in an e-mailed statement that the San Ramon, California-based company’s “cash position supports our long-held financial priorities,” and declined to comment on any acquisition plans. He referenced a March presentation to analysts in which Chief Financial Officer Pat Yarrington listed the company’s priorities, which included paying dividends, funding capital projects and returning surplus cash to shareholders.
“We are in a period of heavy investment and our cash balance allows us to weather lower commodity prices,” Avram wrote. “We view a strong balance sheet as a risk mitigation tool.”
Chevron, with a market value of $206 billion, said last month that it pumped 3.2 percent less oil and gas from its 56,000 wells during the third quarter compared with a year earlier, extending the company’s streak of production declines to a seventh straight quarter, the longest since a nine-quarter stretch that ended in 2008. Shutdowns related to weather and repairs contributed to the recent drop, the company said.
Chevron and other international oil producers have also seen production eroded as higher crude prices triggered contractual clauses in nations such as Nigeria that reduce foreign operators’ share of output from wells. Brent oil futures, the benchmark for two-thirds of the world’s oil, averaged about $111 a barrel since the end of 2010, a more than 55 percent increase from the prior two-year period.
Still, Chevron has underperformed competitors squeezed by the same global pricing mechanisms. Chevron’s production slide began in January 2011, six months before Exxon began registering a falloff in output and 18 months before Shell’s oil and gas volumes began to slip, according to data compiled by Bloomberg
Chevron, which said in March that it’s aiming to raise daily production by one-fifth by the end of 2017 to the equivalent of 3.3 million barrels of crude, has since said it won’t meet this year’s output goals. It’s spending almost $90 million a day this year to search for untapped reserves and build gas-export plants from the Indian Ocean to the Baltic Sea.
“Chevron is trying to grow through the drill bit, but when you can’t do that, you need to go get someone,” said Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis.
Chevron has swelled its reserves of cash by more than 60 percent since the beginning of last year, in part to finance its share of costs for the construction of the sprawling Gorgon and Wheatstone gas-liquefaction complexes in northwest Australia. Its $21.3 billion in cash and equivalents as of Sept. 30 compared with $13.1 billion for Irving, Texas-based Exxon and $18.8 billion for The Hague-based Shell, according to data compiled by Bloomberg.
“Chevron certainly has the balance sheet to do large-scale M&A,” said Pavel Molchanov, an analyst at Raymond James Financial Inc. in Houston. “They have always used a blend of organic growth and acquisitions, it’s never been an either-or thing with them.”
Oppenheimer & Co. analyst Fadel Gheit wrote in a Nov. 14 note that he was “intrigued” when Chevron filed with regulators earlier in the month to issue debt, given the company’s cash hoard. The so-called shelf registration “leads us to think that Chevron may be prepared to make a large acquisition of a highly leveraged company and needs the additional cash to wipe out this high cost debt.” On Nov. 28, the company raised $4 billion in the bond market.
Oil explorers Cobalt, Ophir and Kosmos, which have stakes in untapped oil fields in some of the world’s most-promising offshore regions, could be appealing targets, said Matthew Portillo, Tudor Pickering’s vice president of exploration and production research in Houston.
Cobalt, the Houston-based deep-water oil explorer, announced a “significant” discovery in the Gulf of Mexico yesterday at a well in which it owns a 60 percent interest. The $11.6 billion company also has projects off Angola that Tudor Pickering estimates hold more than 1 billion barrels of crude.
Lynne Hackedorn, a Cobalt spokeswoman, declined to comment on whether the company has been approached by Chevron or would consider a sale.
Kosmos, with a market value of $4.6 billion, continues to amass “very attractive” assets in oil-rich coastal zones of Gabon, Angola and Morocco and could be a good takeover candidate for an international oil producer such as Chevron, Portillo said. The Dallas-based company is led by the management team that scored a series of exploration triumphs off the African coast in the 1990s for Triton Energy Ltd., which later sold to Hess Corp.
Brad Whitmarsh, a spokesman for Kosmos, didn’t return a phone message seeking comment.
“Kosmos has a lot of potential,” Portillo said in a phone interview. The company “has a lot of very attractive assets and high-impact exploration prospects.”
London-based Ophir, the biggest holder of drilling rights in East Africa, has gas holdings in Equatorial Guinea and Tanzania ripe for export to European and Asian markets.
Ophir is seeking a partner with deep pockets to help build a liquefaction plant for its Equatorial Guinea gas, Chief Executive Officer Nick Cooper said in a Nov. 28 interview. The $3.3 billion company may seek a buyer for as much as half of its 80 percent stake in the offshore zone known as Block R, Cooper said then.
Cooper’s office directed requests for comment for this story to an outside spokesman, who didn’t return a phone message.
The hefty outlays required at the Gorgon and Wheatstone projects may temper Chevron’s appetite for acquisitions, said Robert Sweet, who helps manage $150 million at Horizon Investment Services in Hammond, Indiana. The facilities, which will chill gas to a liquid form so it can be transported by tankers to China, Japan and other markets, are scheduled to begin operations in 2014 and 2016, respectively.
Chevron’s 47.3 stake in Gorgon means it will likely pay about $25 billion of the total estimated cost of just over $50 billion. Its stakes in various segments of the Wheatstone project indicate Chevron will be on the hook for more than $20 billion.
Chevron has another $7.6 billion committed to four deep- water developments in the Gulf of Mexico and off the Newfoundland coast, all of which are scheduled to commence production in 2014.
While Chevron may have the resources to pursue a takeover, shareholder Toronto-Dominion Bank said it doesn’t want the company to feel it needs to make an acquisition just to boost output.
“They’ve been bolstering their cash balance and doing all the right things that a disciplined company should do,” Ari Levy, Toronto-based manager of the TD Energy Fund, said in a phone interview. “We wouldn’t want to see them deviate from that for the sake of an opportunistic acquisition. The focus should be on adding value as opposed to pure production growth for production growth’s sake.”
Still, Chevron could use some of its cash pile to buy oilfield-services provider Weatherford International Ltd. (WFT) and take the sting out of its surging costs for such services and well equipment, said Laurence Balter, who helps manage $100 million, including Geneva-based Weatherford and Chevron shares, at Oracle Investment Research in Fox Island, Washington. Karen David-Green, a Weatherford spokeswoman, didn’t return a phone message seeking comment on a possible takeover by Chevron.
“With Weatherford, Chevron could control costs and extend their tentacles,” Balter said. “It would be an ‘out-of-the- box’ move.”