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Oil major Chevron Corporation (CVX - Analyst Report) entered into an agreement with Argentina’s largest energy company YPF S.A. (YPF - Snapshot Report) for the development of shale gas resources in the South American country.

Per the deal, the shale pilot project will be started with the drilling of more than 100 wells in 12 months in the Vaca Muerta area of Patagonia. The expected cost of the project is $1 billion, which will be shared by both the companies. Further, investment of about $15 billion will be needed to complete the development of Vaca Muerta, which may have up to 2,000 wells.

The deal also entails the transfer of 50% stake in Loma de la Lata Norte and Loma Campana fields by YPF to Chevron for which the oil major enjoys the special right to negotiate for 4 months. The fields are located in southwestern Argentina and span over 290 square kilometers.

Chevron also plans to explore additional blocks further in approximately 600 square kilometer area. The cost of the same will be borne by the company for which it will be given a 50% stake in those blocks by YPF.

Management at YPF believes that this deal will enhance production and meet Argentina’s energy demand.

San Ramon, California-based Chevron Corporation is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses. Chevron, in its present form, resulted from the 2001 merger between Texaco and Chevron Corporation.

We believe that this exploration success will boost Chevron’s growth prospects in Argentina.

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.

Chevron currently holds a Zacks #3 Rank (short-term Hold rating). We also maintain a long-term Neutral recommendation on the stock.

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