Chevron Expands in Sumatra

PT Chevron Pacific Indonesia (CPI) – an affiliate of Chevron Corporation ( CVX - Analyst Report ) – announced the start of an expansion plan at Duri field in Sumatra. The company will spend around $500 million for the same.

The project involves building of 539 new wells, which includes 358 producing wells, 36 temperature observation wells, and 145 steam injection wells. These steam injection wells will be utilized to infuse steam into wells so that oil can flow easily.

The project – which is likely to boost Chevron’s growth prospects in Indonesia – comes on the heels of the Area 12 expansion, which was completed by the company in 2009. It added 40,000 barrels of oil per day (bpd) to production.

Management expects the North Duri Development Area 13 project to contribute 17,000 bpd at peak production level. It is also anticipated that Chevron Pacific will produce 343,212 bpd or 39% of Indonesia’s total estimated production (870,000 bpd) by 2013 end.

The second-largest U.S. oil company by market value after ExxonMobil Corp. ( XOM - Analyst Report ) , Chevron currently holds a Zacks #3 Rank (short-term Hold rating). We also maintain our long-term Neutral recommendation on the stock.

In recent times, management has made significant progress in re-balancing Chevron’s asset portfolio by divesting non-core and high-cost assets. The company’s decision to sell its marketing businesses in Kenya, Nigeria, Uganda, Western Africa and Brazil is part of that strategy. In particular, Chevron plans to exit the low profit generating business and concentrate on the discovery of oil and gas worldwide.

However, Chevron’s production growth profile depends on the timely development of upstream projects, almost all of which have inherent risk factors. Time and cost overruns on these programs may lead to lower returns going forward.