Chevron to Explore in China

Chevron China Energy Company – subsidiary of the U.S. energy behemoth Chevron Corporation (CVX - Analyst Report) – entered into two production sharing agreements with China National Offshore Oil Corporation – parent company of the Chinese energy giant CNOOC Ltd. (CEO - Analyst Report).

The contracts are for the exploration of blocks 15/10 and 15/28 located in Xijiang Sag of Pearl River Mouth Basin in the eastern part of the South China Sea. Together, the blocks cover an area of about 2,233 square miles in water depth of 50–100 meters.

Per the deals, Chevron will have 100% stake in both the shallow water blocks, while CNOOC will have the right to share up to 51% in any commercial discovery. Chevron will operate both the blocks and will carry out 3D seismic data surveys. The cost of the same will be borne by Chevron. No other financial term was disclosed.

This deal is a part of the strategic move by Chevron to develop its business in the Asia Pacific region.

Chevron is currently a Zacks Rank #3 (Hold) stock, implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months. We are also maintaining our long-term Neutral recommendation on the stock.

The energy giant’s current oil and gas development project pipeline is among the best in the industry, boasting large and multi-year projects. Additionally, this second-largest U.S. oil company by market value after ExxonMobil Corporation (XOM - Analyst Report) possesses one of the healthiest balance sheets among its peers that help it to capitalize on strategic investment opportunities.

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 about the company’s high level of capital spending, which may result in reduced returns going forward.