Chevron's Go Big or Go Home Strategy in Kazakhstan Could Help Boost Its Dividend

Company followers are confident in the project and some are calling for value creation of more than $15 billion for the San Ramon, Calif., oil and gas giant.
By Tom Terrarosa ,

Chevron (CVX) - Get Report said Tuesday that its opted to sign off on a $36.8 billion investment for the future growth of the Tengiz oil field in Kazakhstan, but should investors be worried about what a sizable project investment could do to the balance sheet, and possibly their dividends in the near-term?

The San Ramon, Calif., oil and gas giant has gotten into trouble in the past, according to company followers, for overextending its project load, which in turn strained the company's balance sheet and led it into free cash flow negative territory. 

And the market certainly hasn't responded well to the news, seeing shares fall well back from highs of nearly $105 apiece hit last last week to below $103.50 per share Wednesday. 

Fortunately, analysts don't see the need for much worry and certainly don't feel dividends are in jeopardy, as they largely believe the project, known as the Tengiz Future Growth and Wellhead Pressure Management Project, is a sound investment and within the company's previously disclosed capital expenditure guidance.

Indeed, Chevron's announcement appears to be following the playbook the company set in December when it provided 2016 capex guidance of about $26 billion and said it would channel most of those funds toward its upstream and downstream segments for international projects.

"The Tengiz field has arguably been Chevron's most profitable project since it entered in 1993, generating [more than] $30B in [free cash flows] from 1.5 [billion barrels of oil equivalent] of net production," Tudor, Pickering, Holt analysts wrote Wednesday. "The field epitomises 'big fields getting bigger' as CVX's [proven] reserves from Tengiz of 2Bboe is more or less unchanged from 15 years ago. Therefore it is no surprise that CVX has opted to sanction a $36B project to maintain and grow production."

Tudor expects the project will add about 300 million barrels of proven oil reserves and bring the value of the Tengiz oil field above $15 billion to Chevron at $75 per barrel commodity prices.

Tudor rates Chevron a "buy" with a $115 price target and Exxon a "sell" with a $75 price target.

Morningstar's Allen Good said it's important to note that Chevron won't have the number of projects running concurrently in places like Australia and the deepwater Gulf of Mexico that have in the past put pressure on its balance sheet. 

"Obviously with a project this big, there are plenty of risks: execution risk, budget risk, etc.," Morningstar analyst Allen Good told TheStreet via phone Wednesday. "But this has proven to be a good project. It's a large resource, and it probably gives Chevron one of the better growth portfolios post-2018 among its peers."

Good has a "hold" rating on Chevron and $95 per share price target.

And growth means good things for future dividends. 

Furthermore, Chevron is likely going Dutch on this investment, as the operator of the Tengiz joint venture, also known as TCO, owns just a 50% working interest, while ExxonMobil  (XOM) - Get Report holds a 25% stake; KazMunayGas, the state-owned oil and gas company of Kazakhstan, owns 20%; and LukArco, a subsidiary of the Russion oil giant Lukoil, owns 5%. 

Considering Exxon's more than one size up on the rack from Chevron and owns a stake half of the size, Good sees no reason to fear a strain on this investment for the Irving, Texas oil and gas behemoth, either. He has a "sell" rating on Exxon and a $79 price target.

This article was updated to include analyst price targets and ratings.

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