Chevron is writing down about $11 billion worth of assets and it’s not good for the entire market. The company announced last week that the sum would be for the current quarter as it revalues its assets, which include shale gas production sites in Appalachia and deep-water projects in the Gulf of Mexico.
It is one of the biggest moves in Dow Jones in 2019. Howard Silverblatt, senior index analyst at S&P Dow Jones indices, said it could reduce 2019’s fourth-quarter overall S&P 500 earnings by $1.32 per share, depending on the final charge.
Companies in the index are estimated to earn $40.40 a share in the current quarter, according to S&P Dow Jones, and that would represent a chunk of the fourth quarter’s earnings. According to the estimates, the whole S&P 500 is expected to earn $158.50 a share for the full year.
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Chevron CEO, Michael Wirth told CNBC’s Squawk Box: “We regularly take a look at our long-term outlook for commodity markets.” He added “AS we do that, we also look at our assets and we evaluate which assets will deliver the highest returns on investment for our shareholders… and the assets in the Northeastern U.S., along with some in Canada and other parts of the world simply don’t compete as well for our investment dollar as others do.”
Last month, the oil giants reported a 36% decline in third-quarter earnings as lower oil and natural gas prices offset an increase in production. Chevron earned $2.6 billion in the third quarter, down from $4 billion a year earlier. It also warned that higher costs could affect fourth-quarter results.
The company also announced a $20 billion capital spending budget for 2020, and revealed it is considering offloading its natural gas projects due to dwindling oil price.
Over two months ago, Chevron had sold off most of its assets in Nigeria, suggesting that it is already on the course offloading many of its natural gas assets around the world.
While the company is pointing at the cheap cost of oil products as a reason it’s taking judicious steps with capital to ensure that its shareholders go home with decent dividends, there is a hint that it may be considering a new direction outside the natural gas industry.
Competition in the midst of plenty oil has posed undeniable threat in the industry that even the biggest oil company in the U.S. can’t deny it. There is a gas glut in North America that has made the resource very cheap, and OPEC attempts to lift prices by cutting output has yielded little result.
Whilst the threat of cheap products as a result of its surplus is glaring, the quest for cleaner energy has become the bigger threat. The world is slowly transitioning to green energy in a bid to combat climate change. So the alternative to natural gas might show up any day and take the industry unaware.
A couple cities in California may likely ban natural gas in new buildings according to San Jose Mayor, Sam Liccardo. This comes as a measure to tackle it at more local level given federal stance on the matter. The idea may eventually get contagious in no time if it is successfully implemented in San Jose. While it will become a win for the fight against climate change, it will trigger the biggest threat to the natural gas industry.
Chevron is not the only company to tread this path, Schlumberger Ltd. and Repsol SA had ascribed a lower value to their assets at a time when the growing adoption of cleaner energy stokes speculation that demand for fossil fuels may peak in a few years. Schlumberger posted a $12.7 billion writedown in October, while Repsol did a $5.3 billion two weeks ago.
The intrigue emanating from the steps taken so far by Chevron is ripping through the oil and gas industry with the premonition of post fossil fuel era, and many companies are becoming paranoid as a result. A piece of Wall Street Journal captured it this way:
“The sobering reappraisal by one of the world’s largest and best-performing oil companies is likely to ripple through the oil and gas industry, forcing others to publicly reassess the value of their holdings in the face of a global supply glut and growing investor concerns about the long-term future of fossil fuel.”
The long-term future of fossil fuel has come under serious question that oil and gas based economies are working hard to diversify their economy in anticipation of the worst.
The institutional tranche of Saudi Aramco’s Initial Public Offering (IPO) was about three times oversubscribed with orders worth $50.4 billion. Aramco was valued at $2 trillion, making it the most valuable company in the world.
Aramco’s IPO holds the record of being the highest in the world, but the decision to go public has been part of Prince Mohammed bin Salman’s plan to diversify the Kingdom’s economy from oil.