Warren Buffet’s Chevron Dilemma - Africa’s premier report on the oil, gas and energy landscape.

Warren Buffet’s Chevron Dilemma

By Gerard Kreeft

Warren Buffet, America’s most foremost and savvy investor, is a major Chevron investor. Berkshire Hathaway, his investment vehicle, owns 8.16% of Chevron, representing $23Billion. His foremost ability is owning stocks that have regular and high dividend returns. The Chevron dividend has for the last 35 years increased incrementally every year. No wonder that Buffet has become the symbol of blue chip stocks.

Is this about to change? Could Chevron give Buffet a black eye? This deserves a short explanation. Buffet has in the past been candid about how his early investments turned out to be duds. Berkshire Hathaway, as Buffet recalls, was originally highly involved in New England’s fading textile industry. Lessons learned from the textile industry have been a strong influence on Buffet’s investment strategy. Could Chevron go the way of the New England textile factories?

Two key factors play a role: Chevron’s lack of diversity of supply and logistically bringing Tengiz oil to the market place.

The Present Situation
Mike Wirth, Chevron’s Chairman and CEO recently revealed that two-thirds of Chevron’s total production of 3Million barrels of oil will, in 2025, come from just two projects: Tengiz in Kazakhstan and the Permian Basin in the United States will each yield 1Million barrels of oil equivalent per day. Not exactly diversity of supply.

The company’s market cap is now $284Billion. Chevron’s positive image is largely because of its dividend track record: the company has increased dividend payouts for 35 consecutive years.

Chevron management, nonetheless, has suffered important setbacks at the company’s Annual General Meetings in both in 2021 and 2022. Over the objections of management, 61% of shareholders voted in 2021 for a proposal to encourage the US company to reduce its emissions. At the 2022 annual shareholders meeting 39% of shareholders voted for a resolution asking the company to provide quantitative information how a net zero by 2050 will affect key components of Chevron’s financial position, including potential impairments, remaining asset lives and asset retirement obligations.

In 2021, Chevron established a New Energies division devoted to lower-carbon technologies, pledging to spend $10Billion through 2028—about $2Billion per year, or 12.5-14% of Chevron’s projected capital budget. The company’s new energy division is focusing on the following areas:
• Renewable natural gas products;
• Renewable fuel products;
• Hydrogen production;
• Carbon capture and storage.
Will Chevron shareholders see Chevron’s new energy division as a new direction or mere symbolism? Certainly, Europe’s supermajors-BP, Shell, and TOTALEnergies-who have a dash of renewables, have seen their share prices remain stagnant. Is the alternative simply to follow the hydrocarbon route?

The company has indicated that over the next 3 years it will spend some $10.5-$12.5Billion yearly in the USA, mostly in the Permian Basin and Gulf of Mexico. This means that at least 75% of Chevron’s total capital budget over that period is pledged for the U.S. market.

Outside the USA, Chevron will spend $3.5Billion, or 70% of its international budget, to develop its Tengiz asset in Kazakhstan, with the remaining $1.5Billion spent elsewhere. This is not promising for Africa, where Chevron has major operations stretched across the continent, including major projects in Nigeria, Angola, Equatorial Guinea, and Egypt that have received limited funding in order to bankroll Tengiz. Putting so many of its eggs in the Tengiz basket could be a strategic vulnerability: if Tengiz output falls short, Chevron’s market performance will suffer, potentially dramatically.

The Caspian Region, particularly Kazakhstan, has been a key frontier for Chevron since the break-up of the Soviet Union. Tengiz, Kashagan and Karachaganak were all major projects taken on at great risk, but they garnished great financial wealth which in turn generated cashflow for the majors to develop projects around the globe, including Africa.

This is about to change. WoodMackenzie is predicting that, by 2030, annual capital spending on upstream oil and gas projects in the Caspian Region will drop 50% from it’s 2018 peak of $20Billion.

According to WoodMac most of the largest pre-FID (Final Investment Decisions), both brownfield and greenfield, do not generate an IRR(Internal Rate of Return) above 20%. Tax issues, cost overruns and project delays are key constraints. Add carbon neutrality to the mix and you have the ingredients for a perfect storm.

When the Soviet Union broke up in the early 90s and Kazakhstan emerged as a new oil province, Chevron was seen as an ambassador of US goodwill. Chevron’s prize was operatorship of Tengiz (50%) and ExxonMobil gained a 25% share. Chevron also has an 18% share in the large Karachaganak Gas Field.
What once was a sign of great wealth—Kazakhstan’s oil riches—could turn sour very quickly. Both Chevron and ExxonMobil, key developers of Kazakhstan’s prosperity, are also the two key oil majors lacking any serious decarbonization and energy transition plans. While this is most relevant for the Caspian, it is also a warning for Africa where both companies have major projects.

Expiry date for the Tengiz concession is 2033. What will happen then? Given the huge costs, highly sulfur-based oil and low chance of carbon neutrality, Tengiz could become a vast stranded asset. To date Shell has abandoned two Kashagan projects in Kazakhstan because of high costs. Tengiz was for most of its duration Chevron’s crown jewel, providing cash to developing assets elsewhere including Africa. Given Chevron’s current strategy it can only hope that Tengiz can continue to squeeze out more oil.

Caspian Pipeline Consortium (CPC)
An equally troubling problem is the Caspian Pipeline Consortium (CPC) which transports Caspian oil from Tengiz field to Novorossiysk-2 Marine Terminal, an export terminal at the Russian Black Sea port of Novorossiysk. The CPC pipeline handles almost all of Kazakhstan’s oil exports. In 2021 the pipeline exported up to 1.3Million barrels per day(BPD). On July 6, 2022 a Russian court ordered a 30-day suspension of the pipeline because of an oil spill. The CPC appealed the ruling and the suspension was lifted on 11 July of the following week, and the CPC was instead fined 200,000 rubles ($3,300). Also there have been unconfirmed reports that western service companies are refusing to provide repairs and spare parts, which could be seen violating sanctions against Russia.

The incident demonstrates the vulnerability of Tengiz and future production. No doubt this is not the last such incident which involves Russian and Kazakhstan goodwill to ensure that Chevron’s Tengiz Project does not falter. Having to depend on Russian-Kazakhstan goodwill to guarantee Tengiz production has put Chevron’s lack of diversity of oil supply in a very bad light.

Permian Basin
A final sour note for Buffet could be Chevron’s Permian Basin assets. What assurances do we have that Chevron’s Permian Basin adventure will fare better than that of past shale operators?

In a 2021 March report IEEFA (Institute for Energy Economics and Financial Analysis) found the 30 producers generated $1.8Billion in free cash flows in 2020 after slashing capital spending by $20Billion from the previous year.

“Last year’s positive free cash flows were only possible because shale companies cut their capital spending to the lowest level in more than a decade,” said Clark Williams-Derry, IEEFA energy finance analyst and co-author of the report. “Restraining capital spending could help the fracking sector generate cash, but low levels of investment also undermine the industry’s prospects for growth.”

Since 2010, the 30 companies examined by IEEFA had reported negative free cash flows totaling $158Billion.

“The positive free cash flows pale in comparison to the industry’s accumulated debt loads.”

The 30 shale producers owe almost $90Billion in long-term debt, and the reductions in capital expenditures are unlikely to ensure that the industry grows .

If Buffet is seen visiting Tengiz or the Permian Basin. investors should sit up and take notice. It will be, perhaps, an indication that much like the New England textile mills, all is not well in the land of Chevron.




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