Reuters Insider - Breakingviews TV: Chevron’s hit

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11/12/2019 18:53

Click the following link to watch video: https://share.insider.thomsonreuters.com/link?entryId=0_st1nhwmi&referenceId=0_st1nhwmi&pageId=ReutersNews
Source: Thomson Reuters

Description: The oil giant is scrubbing $10 billion of assets from its balance
sheet, most of it down to low gas prices. Investors had already seen the
writing on the wall. There’s a bigger message about climate change that they
may still be missing though, Antony Currie argues.
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Video Transcript:

This video is sponsored by Refinitiv. The company that powers the financial
markets. 

Antony, oil driller Chevron unearth a shocker yesterday. It said that it's
going to write down $10 billion or $11 billion worth of its assets. This does
not sound good. What's happened? 

No. I mean, normally, you think that happened completely out of the blue. You
think shareholders are going to go, "Oh, my god, what's going on?" But there's
no reaction. What's they're doing basically is saying, "Look, basically, we've
had enough of natural gas." Not everywhere but certainly in the Appalachia in
America and also in Kazakhstan, and couple of other places where they're
cutting back. Now I think the real reason there is gas prices have come down a
long way, right? They're now $2, $2.50- so really not getting much for your
money there. So what they're doing is trying to concentrate on areas where
they could make money. So for example, the Bakken down in Texas and elsewhere
down the South, or of course in their regular oil areas as opposed to gas. 

Got it. So they've got this big reserve- resource in Appalachia, gas prices as
you said gone through the floor because there's so much of it. Why don't
investors care, because the Chevron shares today are knocked down anything
like what you'd expected in the news?

Well, I think to a great extent it's because shareholders probably expected
something like this. If you look at what the company's talked about, the
Appalachia, over the past few years, it's come up like three or four times in
the past four or five years on investor conference calls. So it's not as if
they pay much attention to it. Also, go back to few months when Chevron was
trying to buy Anadarko. Of course, that deal failed because Occidental
Petroleum came in and stole from underneath them. But Anadarko had already
sold its Appalachia assets I think three years ago. So it's not as if even
that deal would done anything to sort of spark up its natural gas assets in
that region. So it's basically, look, we're not interested in it. You're not
interested in it, investors. The price is low, so why bother? Basically,
they're almost saying, "Let's just get on with the rest of the show." It's
only a smaller part of their assets, right? It's like 5% of their overall
assets.

So interesting that if Chevron had managed to buy Anadarko, as you say, and
that was like $38 billion, $40 billion deal, we probably wouldn't even have
noticed the size of this write-down because they would have been even bigger
in the bits that they want to be dig in, which is the Permian Basin in Texas. 

Yeah. And it could've even been, "Let's just- with the assets, we may well yet
sell these assets." Interestingly, they're taking a write-down. They're also
saying, "Look, we want to concentrate on businesses where we can make a high
return," which basically means- as they basically stated in the release,
shorter-term projects with less capital needs. And that's basically what
ConocoPhillips said a month ago as well. 

So let's put this into a bit of broader perspective, because oil majors have
written down assets before. They decide that things are worth what they paid
for them. BHP Billiton did this a long time ago with shale. But there are
bigger risks, right? So you wrote yesterday that actually this is going to
look like peanuts compared to what's coming down the pipes for some of these
oil companies. 

Yeah, if you think about all the other assets they've got and the other big
fossil fuel players have got, it's all in businesses which, unless they find
some kind of fantastic carbon-capture technology, is going to be massively
whacked by climate risk and by government responses, by shareholders pushing
them to do things. So look, it's not as if this $10 billion is nothing. It's
just that if you look that in the context of their broader assets, which is
going to impacted by how everyone thinks about climate change in the next few
years, I think that is ramping up. Then $10 billion is going to look like
peanuts, frankly. 

So when climate change really hits home, they're going to wish they could get
away with turning for another write-down. 

Exactly, yeah. 

Well, thanks, Antony. Join us here tomorrow for more Breakingviews