Chevron is unloved by investors and by the residents of its home base. No matter: John Watson has built a cash-laden profit machine that’s poised for the greatest oil strike in the history of energy
John Watson is an odd fit for an oilman. For one thing, he’s a Californian in an industry dominated by Texans, Saudis and Russians. A Bay Area native, no less, who attended the University of California in the 1970s and now lives minutes away from Berkeley. Instead of cutting his teeth in the oilfields like Exxon Mobil CEO Rex Tillerson or wildcatting billionaire Harold Hamm, Watson studied agricultural economics and started his oil career as a financial analyst, not a roughneck.
He’s an odd fit for California, too. Watson is, to use Mitt Romney’s term, ‘severely conservative’. At 6-foot-4, charismatic and silver-tongued, he’s a throwback to the Golden State of Chevron’s predecessor, Standard Oil of California. That was a time when fortunes came not via gaming apps or silicon chips but from mines gnawed into the Sierras and wells drilled in the dusty wastes of Bakersfield à la There Will Be Blood.
So, perhaps it’s fitting that this misfit CEO runs an odd-duck energy company, one that takes a contrarian strategy on almost every major trend. As his American rivals scoop up the frackable plots powering the great domestic oil and gas boom, Watson has largely taken a pass. And while global giants like Exxon Mobil, Cnooc and Rosneft have built themselves up through acquisitions of big companies like XTO Energy, Nexen and TNK-BP, Watson says he’s not doing any deals, despite a balance sheet fat with $22 billion in cash.
Watson’s quest has been focussed on cost-efficient reserves, particularly oil, which boasts better economics. Chevron generates a profit of $24 per barrel of oil versus Exxon’s $19.80, which is in line with Big Oil’s average. “We are always value-focussed on what we do. We are not barrel-focussed, per se,” says Watson.
So, while Watson needs to get bigger, he’s making an enormous bet that he can keep those efficiencies up by growing internally. How big is the wager? His capital expenditures have topped $100 billion over the past five years. Chevron will invest $37 billion this year alone—about the same as Exxon Mobil, despite having roughly half of its market cap ($225 billion versus $400 billion). “What differentiates us now is that we have a growth profile with more of the same,” says Watson. “We have more depth in our portfolio than we’ve ever had, and they are good projects.”
Taken together, Watson promises, these ‘good projects’ will boost the company’s oil and gas volumes by 25 percent to 3.3 million barrels per day in just four years, the rough equivalent of adding the capacity of Chesapeake Energy or Occidental Petroleum. That kind of euphoria is unheard of at oil companies these days. The balance of power has shifted towards the state-owned giants that sit on the world’s last deposits of highly lucrative easy oil. The publicly traded, vertically integrated giants like Exxon, Shell, BP and Total have had to go after deeper and trickier resources. All struggle just to keep output steady, while some have given up trying to stay big: Conoco-Phillips split itself up, and BP shed billions in assets after the Deepwater Horizon disaster. Exxon, despite its $40 billion acquisition of XTO Energy in 2010, has had five straight quarters of declining output.
The markets are just starting to notice. Chevron shares are 20 percent higher than they were two years ago, versus 0.5 percent among its Big Oil rivals and 18.5 percent for the S&P. Yet, with shares trading at just 8.6 times earnings, with a 3.1 percent dividend yield, investors seem leery of what amounts to numerous blank-cheque fishing expeditions. “The key question is less Chevron’s ability to grow, more the capex required to get there,” says Ed Westlake, analyst at Credit Suisse. Deutsche Bank analyst Paul Sankey adds that it’s hard to justify not returning that $22 billion in cash to shareholders given record-low interest rates and the fact that Chevron is carrying a relatively minuscule $12 billion in debt. Others wonder why Watson hasn’t gone shopping.
Ask Watson about that and he shrugs. “The idea that our balance sheet will drive us to an acquisition is not supported by our history or by anything that I or my predecessors have said.”
For Watson, internally growing a Chesapeake Energy-level of output over the next four years means a focussed number of massive bets. In Kazakhstan, Chevron will invest $25 billion more into the Tengiz megafield to take daily production to 1 million barrels from the current 750,000. In Nigeria, it’s investing $2 billion offshore as well as $8 billion to build the nation’s first gasto-liquids plant. In the deepwater Gulf of Mexico, Chevron has plowed in $12 billion to build out three more fields, which are projected to produce 100,000 barrels per day by 2015.
But as Forbes first reported in 2011, the real monster is Gorgon, a $52 billion liquefied natural gas joint venture in Australia that’s one of the biggest infrastructure projects of any kind on the planet. With more than 50 trillion cubic feet of gas discovered nearby, there’s enough gas not only to keep Gorgon going for 40 years but also to justify Chevron and its partners, including Shell and Apache, investing $29 billion in another LNG project nearby called Wheatstone.
In Iraq, Chevron spent months studying every field being licensed by Baghdad. But while every other big oil company made one deal or another to rehab Iraq’s megafields, Chevron did not. Because the terms, a set fee of $1.50 per barrel produced, weren’t good enough. “We’re not a believer in loss leaders,” says Kirkland. “You can’t make money at $1.50 a barrel; it’s not competitive with other opportunities in the world.”
“California has been a trendsetter in many areas, and most of them have been positive over time. Air emissions are down. The state’s air and water are much cleaner,” says Watson. And yet, “no energy-intensive business would choose to locate here. So, what you’ll get is a migration of businesses—a rapid deindustrialisation. California will effectively export carbon and the jobs that go with it”.
(This story appears in the 19 April, 2013 issue of Forbes India. To visit our Archives, click here.)