U.S. energy giant Chevron Corporation CVX announced a sharp reduction in its projected 2016 capital spending budget, which was not at all unforeseen. The company is expected to spend roughly $26.6 billion next year, about 24% lower than the anticipated 2015 expenditure.
Of the total amount, Chevron has allocated $24 billion for upstream operations − in the domestic and international markets. Most importantly, majority of the spending of about $18.6 billion will be directed toward international exploratory activities.
In more details, of the total spending on upstream works, $9 billion will likely spend on the existing producing resources. For the developments underway, $11 billion is expected to be invested. Moreover, $3 billion is allocated for the yet to be sanctioned projects. Additionally, spending on world-wide exploratory works will be $1 billion.
It is to be noted that for the downstream operations, Chevron will likely invest $2.2 billion.
As already mentioned, a reduction in capital budget amid prolonged weakness in oil prices is quite expected.
San Ramon, CA-based Chevron is one of the largest integrated energy companies in the world with an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting large, multi-year projects. Additionally, Chevron possesses one of the healthiest balance sheets among its peers, which helps it to capitalize on investment opportunities with the option of making strategic acquisitions.
However, the ongoing oil price slump has affected the group’s earnings and cash flows, in particular at its upstream unit. We are also concerned about the company’s high level of capital spending, which may result in reduced returns going forward.
As a result, Chevron currently carries a Zacks Rank #3 (Hold), implying that the stock will perform in line with the broader U.S. equity market over the next one to three months.
Meanwhile, some better-ranked players in the energy sector are Energy Transfer Equity, L.P. ETE, Boardwalk Pipeline Partners LP BWP and Murphy USA Inc. MUSA. All the stocks sport a Zacks Rank #1 (Strong Buy).
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