TTFNF - Chevron: What Issues Do Not Last

2023-12-01 17:46:13 ET

Summary

• Chevron Corporation's stock price has dropped due to issues with earnings and the threat of war between Guyana and Venezuela.
• The dispute is a distraction from Venezuela's own economic issues and a sign of the government's possible collapse.
• The war between Guyana and Venezuela is unlikely to have a significant impact on the offshore oil business in Guyana.
• Despite the current challenges, Chevron's acquisition of Hess Corporation is likely to go through, and the company has a strong portfolio of projects for future growth.
• The upstream profits issue appears to be an inventory timing issue and other short-term type things that really do not affect long-term earnings prospects.

Chevron Corporation ( CVX ) common shares sank on earnings-related issues and now the threat of war between Guyana and Venezuela. Evidently Venezuela, which has completely destroyed a once-thriving oil industry, now wants to wreck another. More seriously, all the issues that have caused the Chevron stock price to tumble are likely to be quickly resolved. Both the earnings issues and the threat of war will be discussed below. This is far more likely a good time to invest in Chevron stock for a recovery from these issues and possibly Hess ( HES ) stock as well, as that deal is likely to go through.

The Border Dispute

Venezuela will be voting on its annexation proposal even though that vote is likely a foregone conclusion. Probably far more material is that a United States contingent is now in Guyana while Brazil has moved its troops to its Northern Border. Just about everyone I can think of is aligned against Venezuela. The International Court just ruled a gainst any changes. That includes an invasion.

What this is far more likely a sign of is the eminent collapse of the Venezuelan government that has badly managed its oil reserves to the extent that a once-dependable profit stream is now non-existent. The resulting economic conditions now appear to be favorable for a change in government.

This "dispute" is a way for the Venezuelan government to get the spotlight off of its own issues and put the focus and frustrations of the public elsewhere for what the dictatorship hopes is a fast victory with a lot of accolades and of course cash flow.

The Dispute's Effect On The Guyana Oil Business

No matter the outcome, the effect on the offshore business is likely to be nonexistent. The Venezuelan regime, even if the regime by some chance gains control of this production (not likely) are very likely to agree to allow the current operators to continue in some form. They should have learned their lesson from their own experience. Chances are they would be boycotted or the money due would be held in reserve if it came to that until things settled.

The fact that Brazil and the United States have a presence, and that Brazil has long been a big supporter of Guyana, probably means this is going to be very noisy and not much else.

In any event, Venezuela would have no way of doing anything about the offshore business. The Venezuelan government is basically broke by all accounts, which limits its ability to really do much of anything.

The most likely outcome here is that Guyana remains in one piece with the considerable backing that it has now.

Next Issue - Cost Overruns

The cost overruns and delays on the T engiz Field in Kazakhstan.

" Nearby is another world-class reservoir, the Korolev Field. Chevron holds a 50% interest in Tengizchevroil (( TCO )), which operates the two fields."

Source: Chevron Project Portfolio on the Chevron Website, November 30, 2023.

Probably based upon the conference call , the realization that the project is not meeting lofty initial requirements is causing some market pessimism. Yet it is not unusual for large projects to have a built-in risk reserve so that if something like this happens, the project will still have a satisfactory profitability level.

What the market often forgets, is that once a project like this gets up and running, there are often debottlenecking projects with real fast paybacks that will often make up (and usually more) for the perceived shortcomings and cost overruns that now dominate the market concerns.

Even if that is not the case, then the market will likely focus on the diversification and what (new projects) soon will take the market focus away from what happened here. Chevron has a lot of possible and ongoing projects. Therefore, the fact that one does not meet expectations is likely to be a temporary focus because the future will find a bunch of new projects to focus on. Obviously, Chevron has far more successes than failures.

Pricing Issues

The market was upset with the pricing obtained by the company during the quarter. But as management pointed out, it was largely the accounting system, driven by pricing choices that management made for reporting purposes that caused the issue.

That makes this reporting issue a timing issue. It will reverse in future quarters, or it is reversing a previous quarter. It is definitely not a cash issue.

Common things that affect this are LIFO (last in first out) and FIFO (first in first out). There are also decisions as to when something is revenue and what will be the revenue (How you know and more. One agreement at a time.).

It is highly unlikely that the upstream situation would continue to drag down results every quarter in the future. But headlines like this :

"Chevron slides after Q3 miss, with sharp drop in upstream results"

could have a big effect on the stock price in the immediate near term. The market often reacts as if Chevron will be getting materially inferior prices for its production well into the future. But that is very unlikely. This is another item that will quickly fade from memory with the next quarterly report.

Hess Acquisition

The market has long punished oil and gas companies that dare to use stock while offering the acquired company a premium. When you add in some of the issues above, the market is having a "field day" clobbering both stocks. Depending upon when you look, Hess is now down roughly 20% from the $171 valuation that at least one analys t was stating was the value put on Hess based upon the deal.

Since this is something like the fifth deal I have seen for the newsletter in the current year (if my memory is correct), the pricing action that has happened is very common.

The Hess deal is likely to go through as it is currently structured. The worries about Guyana are likely to be resolved with Guyana intact. But even on the infinitely small chance that Venezuela got control of the Guyana area it covets, there is likely to be an arrangement that allows any development to continue complete with decent profits.

In the meantime, there is nothing to indicate that the offshore operations would be interrupted at all. That is often the case in a situation like this. Many-times a dispute like this simply determines where the cash will go in the future.

More importantly, Mr. Market often overcomes his very unsupportive attitude towards the industry consolidation going on after the deal closes. Therefore, now is likely to be the time to buy Chevron stock or even Hess stock (to end up with Chevron stock as long as one accepts what little extra risk there is.

Some Positives

Chevron has long been on a shopping spree to pick up some good merchandise before the market "catches-on" and raises prices. The most recent deal was for PDC Energy up in Colorado. Back in 2020, Chevron purchased Noble Energy.

Chevron is big enough that one of these deals can "bomb" without it really affecting the company as a whole very much. The advantage of being so large is the diversification obtained which gives the company the ability to produce steady results despite the headlines.

Chevron also has a " high-hopes " drilling project in Namibia. That project is near a TotalEnergies Se ( TTE ) discovery that is likely to prove to be "world-class." There is obviously some risks here along with a lot more to be delineated and de-risked. But Chevron has an unmatched portfolio of possibilities.

Summary

This quarter can best be summarized by "if it rains, it pours" (and, unfortunately, it is not Morton Salt this time). Every company goes through a quarter (and often more) where the bad news just will not stop.

Investors need to determine though whether the headlines demonstrate an "in-depth" problem or something surficial that will quickly fade away.

In this case, there does not appear to be anything that affects the company for more than a quarter or so. So, it would appear that the market has overreacted.

There has been a lot of focus on the Hess acquisition, which now means there will be focus on a possible war. But I suspect Venezuela is not getting anywhere with this dispute as there appear to be far too many entities aligned with Guyana. Brazil alone can make the difference. But now it appears the United States will be there as well. What is likely to happen instead is that the Venezuela regime may well collapse. Things are just that bad.

Lost in all of this is the next round of projects and the likely faster growth that this round of acquisitions and projects will produce. A company this size can grow as much as 7% compared to the latest roughly 3% with some acquisitions in the mix.

As a result, this stock is a strong buy for growth and income investors interested in a very sound stock with a likely good sized recovery potential back to previous levels. I personally believe that management will have the stock back to old levels and grow the company to push the stock higher. All of this shopping was meant to improve things for Chevron. I believe it will.

Now, the threat of the Venezuela-Guyana dispute has probably raised the risk of all things Hess. However, for those ambitious souls that can handle this risk well, Hess may prove to be a cheap way to own Chevron stock.

I still believe that the deal will go through because I believe that offshore operations are unlikely to be affected. Neither country really has the means to do anything significant offshore when it comes to disputes. I likewise believe that the offshore assets are valuable enough that both sides of the dispute would likely "handle this with care."

All that goes with the warning that oil and gas is a notoriously low visibility industry. This time there is politics involved, which is even less predictable. Still, I believe that logic will prevail and its hopefully my logic that prevails or something like it.

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