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Where Will Chevron (CVX) Spend the Bulk of Its 2019 Capex?

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Chevron Corporation (CVX - Free Report) offered a glimpse of its 2019 capital spending plans.

The company has pegged its capital and exploratory budget at $20 billion, up by 9.3% from its originally projected 2018 investment of $18.3 billion. Next year's budget is also around 6.3% higher than the company’s 2017 spending of $18.8 billion though its down 10.8% from the 2016 expenditure of $22.4 billion.

According to Chevron's Chairman and CEO Michael K. Wirth, the company is looking to concentrate on projects that offer stable production growth, resulting in consistent free cash flow to fund dividend and buybacks. In fact, Chevron expects more than two-thirds of its spending to realize cash flows in two years of investment – most of these being shorter-cycle, high-return projects.

Revised upward for the first time in four years, the second-biggest U.S. oil and gas group's boost in capital spending reflects Chevron's plans to optimize its outlay, while relying heavily on shale drilling.

During the nine months ended Sep 30, 2018, Chevron incurred capital expenditure of $14.3 billion, approximately 88% of which went toward its upstream segment.

Analyzing Chevron's 2019 Capital Budget

Of the American multinational's total 2019 capital expenditure, almost 87% is planned to be incurred in its upstream operations. In particular, Chevron is concentrating on increasing its investment in shale as it strives to boost its U.S. shale production next year.

For 2019, the company intends to spend $5.2 billion in shale – up 21% year over year – the lion's share (or $3.6 billion) going to the lucrative Permian Basin of Texas and New Mexico alone. The remaining $1.6 billion has been set aside for other shale investments. Overall, the oil giant plans to shell out $7.6 billion for its domestic upstream operations. An additional $9.7 billion will target international upstream projects.

Over the last few years, majority of the capital expenditure in its 'Upstream' segment were dedicated to Australian LNG projects – Gorgon and Wheatstone – and the Tengiz field in Kazakhstan. But having completed both Gorgon and Wheatstone, Tengiz remains the only large capital project Chevron is committed to, for which the company has allocated $4.3 billion out of a total $5.1 billion for projects already underway. Meanwhile, Chevron has earmarked approximately $10.4 billion to sustain currently producing upstream assets.

Bets Big on Permian, Tengiz

Permian’s attractive economics means that producers can still make money there at the current, just over-$50-a-barrel price. This is mainly because of the region's extensive pipeline infrastructure, plentiful labor and supplies, and relatively warm winters that makes year-round work possible. Most other domestic shale regions need prices above $60 to support new developments and expansions.

Chevron’s substantial Permian holdings of 2.2 million net acres have already realized production growth of 35% in the past year with the company targeting a CAGR of 30-40% through 2020. Investors should also note that Chevron's Permian production of 338,000 barrels per day in the third quarter was up significantly from the 188,000 barrels per day in last year's corresponding period.

While the Permian shale formation is integral to Chevron’s long-term earnings growth story, the company is pouring the single biggest chunk of its 2019 spending (or $4.3 billion) on the extension of the giant Tengiz field in Kazakhstan.

Projected to cost a total of $37 billion, Chevron owns 50% of the Tengizchevroil joint venture, while 25%, 20% and 5% is held by ExxonMobil (XOM), Kazakhstan's KazMunayGas and Russia's Lukoil, respectively. The project is expected to bolster production in the Tengiz oil field by 260,000 barrels per day. Upon completion, the oil field is expected to generate about 1 million barrels of oil per day, with the first oil production planned for 2022.

 Zacks Rank & Stock Picks

Chevron currently carries a Zacks Rank #3 (Hold).

Some better-ranked players in the energy space areEni S.p.A. (E - Free Report) , Unit Corp. (UNT - Free Report) and Helmerich & Payne (HP - Free Report) . Eni and Unit carry a Zacks Rank #1 (Strong Buy), while Helmerich & Payne has a Zacks Rank #2 (Buy).

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)

The 2018 Zacks Consensus Estimate for Unit is $1.00, representing some 85.2% earnings per share growth over 2017. Next year’s average forecast is $1.62, pointing to another 62.3% growth.

Eni’s expected EPS growth rate for three to five years currently stands at 19.8%, comparing favorably with the industry's growth rate of 10.2%.

Over 30 days, Helmerich & Payne has seen the Zacks Consensus Estimate for FY 2019 and FY 2020 increase 17.2% and 15.9%, to $1.77 and $3.20 per share, respectively.

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