Chevron Takes Harder Punch From Low Oil

By Daniel Gilbert

A year ago, Chevron Corp. was booking the most profit per barrel among the world's biggest oil companies, with its sights set on generating more cash than larger rivals Exxon Mobil Corp. and Royal Dutch Shell PLC.

Today Chevron has slipped hard, as the drop in oil prices combined with its own ambitious expansion have weighed heavily on its earnings.

The company's stock price has underperformed Exxon and Shell over the past year--during which oil prices fell sharply--after besting its two bigger competitors during the previous five years. Chevron's stock price, which rose 2.5% on Monday to $85.89, is down 33% for the past year, compared with 21% drops at Exxon and Shell.

Chevron's $571 million profit in the second quarter was just 10% of its haul a year earlier. Had Chevron not booked a gain for selling a stake in an Australian refiner, the company would have posted a quarterly loss for the first time in almost 20 years. Excluding asset sales and noncash impairments, Chevron earned 97 cents a share.

Exxon and other oil powerhouses have struggled to tame costs and deliver complex projects on time in recent years, but none has bet more on massive energy developments than Chevron. And as its cash flow sinks, the company is hitting snags with a suite of new, multibillion-dollar projects, aimed at boosting its oil and gas output by roughly 20% within two years--a much larger increase than its rivals have pursued.

"Multiple efforts to improve future earnings and cash flows are underway, " Chevron said in a statement. "We are focused on getting current projects under construction online, which will provide incremental production and cash generation."

Chevron is shedding 1,500 workers, waiting to raise its dividend and has delayed some drilling projects to conserve cash.

Yet even as the company prepares to start up its marquee project, a $54-billion natural-gas export plant in Australia, it continues to struggle with delays and mishaps on other big-ticket investments.

Chevron continues to outspend Exxon, which generates twice as much revenue. If oil prices stay low, as many energy economists are now predicting, Chevron might have to sell more of its holdings to pay its dividend. Such a move could jeopardize the oil behemoth's goal of tapping 3.1 million barrels of oil and gas a day by 2017.

Some analysts say Chevron should abandon the goal.

"The most important thing to preserve is value," said Lysle Brinker, a director of equity research at IHS Energy. "If it means they have to sell some of their crown jewels, or small slivers of them, to raise billions of dollars and help maintain the balance sheet and the dividend, that's what they should do."

Chevron's string of big bets stretches back to the fall of 2009 when it gave the green light to tap a trove of natural gas off the coast of Western Australia.

To harvest the gas offshore, it had to be piped 80 miles over a mountainous seafloor to the nearest land, Barrow Island, a federally protected wildlife haven. There, Chevron is building giant refrigeration units to chill the gas into a liquid state so that it can be shipped by sea. It named the project Gorgon.

Within two years, Chevron committed at least $50 billion to five massive projects in Australia, Brazil and the U.S. Gulf of Mexico.

The expansion seemed well-timed. Chevron pumps much more oil than natural gas, and $100-a-barrel crude gave it more of a boost than its big oil rivals. By 2011, Chevron was raking in more profit per barrel than any of its peers. The company raised the dividend twice that year.

John Watson, Chevron's chief executive, met monthly with project managers to make sure Gorgon and other massive investments were on track.

"We have the best project queue in the industry," Mr. Watson said in 2011. "We are poised for a decade of growth."

Chevron roughly doubled capital spending between 2010 and 2012, and it began to suffer a series of high-profile setbacks. In 2012, the company caused an offshore oil leak in Brazil. A blaze on a rig in Nigeria killed two workers. A refinery fire in Richmond, Calif., touched off a wave of hospital visits by residents living close to the plant.

By the end of 2012, Chevron disclosed that the cost of completing Gorgon in Australia had ballooned by 40%, to $52 billion, as labor costs soared and cyclones and logistical snafus slowed progress. A year later, the company said the project would be delayed again and cost another $2 billion.

The company has overhauled the way it manages projects, rolling out a new system to combat cost overruns and delays. By the spring of 2014, with oil prices above $100 a barrel, executives forecast that the company could generate more than $50 billion in cash from operations by 2017 if crude prices remained high--more than Exxon and Shell at the time. But as 2014 ended, oil prices were in a downward spiral and Chevron's operational mishaps continued.

In June, Chevron's start-up on a $4 billion offshore oil project in the Gulf of Mexico stumbled. As workers tried to anchor an oil platform in mile-deep water, the supports tethering it in place sank and were damaged. Chevron had expected to start tapping oil there this year; now it doesn't expect oil until after 2017.

Gorgon, which was expected to ship its first gas cargo in 2015, isn't likely to start until early 2016, and a potential union strike raises the prospect of further delays. Chevron also said that costs could rise for a second major gas-export project in Australia that is under construction.

Paul Sankey, an analyst at Wolfe Research, described the setbacks as a "tsunami of bad news."

Chevron acknowledged that taking on numerous projects simultaneously strained its resources, again pledging to tweak the way executives decide whether to invest huge sums on complex projects that can take years before they produce oil or gas.

"It wasn't so long ago that people were extremely happy with Chevron because the stock price held up so well," said Michelle Foss, chief energy economist at the University of Texas's Bureau of Economic Geology.

Ms. Foss credits Chevron with pursuing first-of-a-kind energy developments, and notes that higher costs on such investments have rippled across the industry.

"I think it was a bigger bite for Chevron than probably some of the other companies," she said.

Write to Daniel Gilbert at daniel.gilbert@wsj.com

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