Chevron Canada Limited – a subsidiary of U.S. energy behemoth Chevron Corporation (CVX - Analyst Report) – has agreed to buy 50% operating interest in the Kitimat liquefied natural gas (LNG) project and the planned Pacific Trail Pipeline (PTP) for exporting energy to the rapidly growing Asia-Pacific region. Moreover Chevron is also set to acquire 50% ownership in an exploration area, spanning roughly 644,000 acres, in the Horn River and Liard shale-gas fields in British Columbia. All these agreements are still subject to regulatory approvals.
As a part of the deal, Chevron will take over the respective 30% stakes owned by EOG Resources, Inc. (EOG - Analyst Report) and Encana Corporation (ECA - Analyst Report) in the project. Subsequently, Chevron will sell 10% of its acquired interest in the development to Apache Corp. (APA - Analyst Report) for $150 million. This will increase Apache’s share in the project from 40% to 50%. Following the transactions, Chevron Canada Ltd. will assume operatorship of both the pipeline and the terminal.
The proposed two-train Kitimat LNG Project carries a license from the Canadian National Energy Board for exporting roughly 10 million tons of LNG annually.
In addition, Chevron Canada Limited is acquiring around 110,000 net acres in the Horn River basin from Apache, EOG and Encana. Chevron will also buy approximately 212,000 net acres of land in the Liard Basin from Apache. Along with Apache, Chevron Canada will share 50% operating ownership in both of these projects. Apache will be the operator of the natural gas developments.
San Ramon, California-based Chevron Corporation is one of the largest publicly traded oil and gas company in the world, in terms of 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 shares currently retain a Zacks #3 Rank, which translates into a short-term 'Hold' rating. We are also maintaining our long-term 'Neutral' recommendation on the stock.
The company’s current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets among its peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions. However, due to its integrated nature, Chevron is particularly susceptible to the downside risk from any weakness in the global economy. We are also concerned by the company’s high level of capital spending, which may result in reduced returns going forward.