Chevron to Invest in Indonesia

U.S. energy behemoth, Chevron Corp. (CVX - Analyst Report) plans to spend approximately $3 billion annually in Indonesia’s oil and gas sector over the next three years. The investments were planned for both the existing and potential developments in that country.

Chevron, occupying the prime place among Indonesia’s crude oil producers, with average daily production of 477,000 barrels in 2010, will focus on funding technological development of the related projects.

Furthermore, the company aims to conclude the engineering and design phase of its deep-water natural gas project, Gendalo-Gehem, in the Kutei basin off East Kalimantan by 2012. Chevron expects daily average production of Gendalo-Gehem to be 1.1 billion cubic feet of natural gas and 31,000 barrels of condensate.

In Indonesia, Chevron operates production sharing contracts like the Rokan and Siak in Sumatra through its wholly owned subsidiary PT Chevron Pacific Indonesia. It also holds operational interests in five offshore Indonesian production sharing contract areas covering approximately 2.8 million acres, four of which are in the Kutei basin. Chevron also holds a 51% stake in two onshore exploration blocks in western Papua and one fourth share in the offshore South Natuna Sea Block B.

Chevron is one of the largest publicly traded oil and gas company in the world, based on proved reserves. Its current oil and gas development project pipeline is among the best in the industry, boasting of large, multi-year projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions. 

However, the company’s integrated nature makes us a little skeptical as it is particularly susceptible to the downside risk from continued weakness in the global economy. We are also concerned about the company’s high level of capital spending, which may result in reduced returns going forward. As such, we see the stock performing in line with the broader market and maintain our Neutral recommendation.

Chevron, competes with the likes of PetroChina Co. Ltd. (PTR - Analyst Report) and Eni SpA (E - Analyst Report), retains a Zacks #3 Rank and a short-term Hold rating.

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