Chevron Eyes New LNG Markets With Kitimat Move

By: by Publicist Report

Leif Sollid, Chevron’s (CVX) spokesperson in Canada, announced that the oil major will purchase a 50% stake at a proposed LNG terminal in Kitimat, British Columbia. Kitimat has promising natural gas deposits, and the proposed project holds a Canadian license to export 10 million tons of LNG/year. Analysts have noted that natural gas prices are low and may not help Chevron much. In this article, I will explain why Chevron’s profitability will not be affected by natural gas prices and instead, will help it to increase its LNG exports in the long run and enter the valuable Asian natural gas market.

What the Kitimat Project Entails

The Kitimat project was jointly owned by EOG Resources (EOG) which held 30%, Encana (ECA) which held 30%, and Apache (APA), which held 40%. Chevron will now hold 50% of the project and Apache will hold the other 50%, up from 40%. None of the companies have disclosed the financial terms of the agreement. The project is located 400 miles north of Vancouver, British Columbia and consists of 290 miles of pipeline. Chevron will convert natural gas into liquid by freezing the gas at minus 260 degrees and shipping it to Asian countries such as China, Japan and South Korea.

GRAPH1 Chevron Eyes New LNG Markets With Kitimat Move

Analyst Lior Cohen used the chart above to suggest that the price of oil will have a greater influence on Chevron’s profitability than the price of gas. Thus, falling natural gas prices will not hurt Chevron’s profitability in the long run. Rather, it will help the company find new markets for natural gas (where it sells at a premium, three times the price of North America) and increase revenue.

How the Purchase will Affect Chevron’s Competitors

Apache will increase its stake in Kitimat from 40% to 50%. The Houston-based company is looking at exporting natural gas to Asian markets as well. Apache’s chairman and chief executive officer Steven Farris said that the company has a proven record of developing shale gas and the new arrangement with Chevron will help the company to grow in British Columbia, often seen as the most lucrative oil and gas destination in North America.

EOG Resources, on the other hand, made $450 million by selling its 30% stake in the project. The company revealed that it had very little interest in pursuing the project and exiting it helped it to increase its capital. EOG has not commented on how it plans to use the $450 million.

Randy Eresman, Encana’s president and chief executive officer, agreed with EOG and said that the sale will help the company to concentrate on its core business. Encana might have sold its stake, but it will continue to support LNG exports as the company believes in the profits that can be made with the help of natural gas in the long run. Meanwhile, Royal Dutch Shell (RDS-A) has ambitious plans to produce almost 14 million tons per year at its LNG project on the West Coast. Royal Dutch Shell has teamed up with Mitsubishi, Korea Gas and PetroChina. Royal Dutch Shell has been at the forefront of LNG exports not only in the U.S. and Canada, but also in Nigeria and Russia.

GRAPH2 Chevron Eyes New LNG Markets With Kitimat MoveChevron’s shares fell by 1% to almost $108 after it announced the purchase of a 50% stake in the Kitimat on December 24th, 2015. However, analysts at Dahlman Rose have continued to reiterate their “buy” position on Chevron. Natural gas has a huge market in China, Japan and Korea, and quite possibly in other emerging countries such as India and Brazil. Chevron will be able to target all of these markets thanks to the Canadian export license, and sell the gas at a premium. In the long run, investors will benefit from increased revenues that Chevron will enjoy as a result.

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