As per media reports, U.S. energy giant Chevron Corporation’s (CVX - Free Report) CEO John Watson is planning to step down, as the company seeks managerial changes to deal with the volatile dynamics of the oil industry. Chevron is expected to announce the transition next month and the company’s vice chairman Michael Wirth is highly anticipated to replace Watson as the new CEO.
A Look into Watson’s Tenure
Watson was appointed as the CEO in 2010. During his seven years chequered tenure he remained focused on three major strategies. These include the acceleration of the development of Chevron’s Permian holdings, cost–cut initiatives amid the industry downturn and planned completion and execution of its mega projects.
Watson has succeeded on boosting the Permian activities by enhancing production and returns. The company owns substantial acreage in the Permian Basin and has also increased its production target for 2020 by 30%.
To cope with the oil slump Watson has resorted to retrenchment strategies, cost cuts, project cancellations and divestments to shore up its financials.Despite slashing costs worldwide, Chevron reported its biggest quarterly loss in 15 years in the first quarter of 2016. The company reported loss per share of 39 cents, wider than the Zacks Consensus Estimate for a loss of 18 cents. In 2016, Chevron posted its first annual loss in 37 years. Nevertheless, Chevron reported robust first and second-quarter results amid the slight recovery in commodity prices, production gains and the continued cost savings initiatives. Chevron’s shares have gained around 36% since Watson’s appointment. This compares favorably with the broader industry’s decline of 15% during the same period. However, stock performance compares unfavorably with the 143% rally of the S&P 500 market during the said time frame.
Further, Chevron spent over $50 billion in its Gorgon and Wheatstone projects, which is a huge investment for a company with market cap of 200 billion. These LNG projects in Australia have already suffered cost overruns and project delays affecting the cash flows of the company adversely. Chevron is still outspending its cash flow, making it dependent on asset sales. Further its Venezuelan operations —which accounts for about 3% of its production — are also facing uncertainty. The company has also not been able to make any strategic acquisitions during the tenure of Watson.
Wirth as the Next CEO
Though oil prices have improved from their lows, but still they are hovering around or below the $50 per barrel mark. Persistent weakness in oil prices poses challenge to the upstream operations of the company as it is not being able to sell crude at attractive prices and hence is unable to generate significant cash flows for shareholders. Chevron being an integrated player, is trying to increase its focus on downstream business which can be profitable in the current environment.
With the election of Wirth — who has substantial knowledge and experience regardingrefining and petrochemicals — as the CEO, Chevron will follow the footsteps of energy majors like Exxon Mobil Corporation (XOM - Free Report) , Royal Dutch Shell plc (RDS.A - Free Report) and TOTAL S.A. (TOT - Free Report) , all of whose CEO’s are refining specialists.
Wirth joined Chevron in 1982 and became the Vice Chairman of Chevron earlier this year. He has spent around 10 years as the executive vice president of Chevron's downstream and chemicals business. To exit non-competitive projects, Chevron divested downstream assets in Canada to Parkland as part of Wirth's strategy. It also lowered the company’s operating and capital costs. Apart from providing a leaner business model, it will also help Chevron to progress toward its $5-$10 billion divestment goals during 2016-2017.
Refining operations are critical to protect the balance sheets of the integrated companies at a time weak crude environment. The company believes that Wirth’s expertise and experience will help the company to control costs at big fuel- and chemicals-processing plants and improve results from its downstream segment.
Chevron currently carries a Zacks Rank #3 (Hold).You can see the complete list of today’s Zacks #1 Rank stocks here
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