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Chevron’s Output Is Deteriorating -- So Should You Be Spooked?

Stocks in this article: CVX XOM RDS.A RDS.B BP TOT APA

NEW YORK (TheStreet) -- Chevron (CVX) reported a drop in production in its latest quarterly results on Friday, as the company's shares dropped by more than 1% and still haven't fully recovered. (As of 1 p.m. Tuesday, shares were trading at $125.83.)

This could be a buying opportunity for long-term investors who consider the six major projects that could revive Chevron's flagging production growth within the next three years.

In terms of price-to-earnings ratio, a metric which is commonly used to measure valuation, with the latest stock price drop Chevron has now become the cheapest vertically integrated oil super-major, as compared to rivals ExxonMobil (XOM), Royal Dutch Shell (RDS.A)  (RDS.B)BP (BP) and Total (TOT).

Read More: Warren Buffett's Top 10 Dividend Stocks

In its second-quarter results, Chevron's net income increased by 5.6% to $5.7 billion, easily beating analysts' estimates on the back of a better pricing environment and gains on the sale of assets. On the other hand, Chevron's quarterly revenues came in at $57.9 billion, unchanged from last year and below the market's expectations, as its production dropped by 1.5% to 2.55 million barrels of oil equivalents per day.

The results came a day after Chevron received a setback when Apache (APA), Chevron's partner in the Kitimat liquified natural gas project off the coast of western Canada, decided to pull out from the joint venture.

Apache's move has cast doubts over the future of the LNG export project, which is 50% owned by Chevron. During the earnings conference call, Chevron's head of exploration and production George Kirkland said that the company will stick to its share in Kitimat, meaning it is not going to buy Apache's stake and will likely seek another partner.

On the other hand, Chevron has three major LNG projects slated to come online through 2016 that could lift its flagging output and earnings. Two of these projects, Gorgon and Wheatstone, are located in Australia. These two projects are  known for their infamous cost over-runs. That said, the $54 billion Gorgon LNG project is now more than 83% complete and will begin first production of LNG from next year. Kirkland expects Gorgon, which could produce 15.6 million tons of LNG each year, will become a key driver of production growth from 2015.

Read More: Disney, Groupon, Tidewater, Take-Two Continue Stream of Earnings

Similarly, the Wheatstone project, with its 8.9 million tons per year, also comes with a hefty price tag of $29 billion and is on track to begin production from the final quarter of 2016. Chevron has developed 40% of Wheatstone and will reevaluate the costs once the project is 50% complete.

The third LNG project is located in Angola. It shut down earlier this year due to technical problems. The $10 billion project, which is 36.4% owned by Chevron, started producing LNG in 2013, but could not operate at full capacity due to frequent problems. However, following repairs and testing, Kirkland has forecast that Angola LNG will begin "sustained production" from the latter half of 2015. This project could produce 5.2 million tons of LNG, 63,000 barrels of natural gas liquids and 125 million cubic feet of gas on a daily basis. 

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