Is Climate Change Raining on Chevron’s Parade?
Shares of Chevron (NYSE:CVX) dipped 1 percent during after hours trading Wednesday after a press release stating that first-quarter earnings would be down from fourth-quarter earnings. Stating that the cause was “principally as a result of adverse foreign exchange effects, and selected asset impairments and related charges,” Chevron hinted at other causes that could create trouble down the line.
In the press release, Chevron stated that, “Current year production has been affected by downtime, in part due to adverse weather across multiple regions including Kazakhstan, Canada, and the U.S.” It did mention that higher demand in Thailand and increased production in Angola has offset this drop in production. However, this seems more like a deflection than a reason to not worry.
Chevron has set aside a $40 billion CAPEX budget in 2014 to fuel growth (even more last year.) So, any production drop from current facilities, if truly offset, should not have any impact on growth and earnings. Although with the increasingly harsh weather this should not come as a surprise, especially after its warning in January of a fourth-quarter drop.
I must admit that it is ironic that climate change is the likely cause of Chevron and other oil company’s current woes, but it needs to be taken into consideration as it is likely only going to get worse. According to a report released earlier this year by the U.S. Accountability Office, America’s energy infrastructure is “increasingly vulnerable.” The report focuses on major areas in the energy supply chain such as drilling, transportation, and electricity, and identified greater extremes in temperature and precipitation, stronger storms, and rising seas as potential threats.
Some things to consider about the risks of climate change on the oil industry:
- The Gulf Coast boasts nearly 4,000 oil and gas drilling platforms, and accounts for about half of the country’s oil and gas production.
- In 2005, Hurricanes Katrina and Rita destroyed 100+ platforms and shut down several refineries, stopping the majority of oil and gas production in the Gulf Coast region for several weeks.
- Rita and Katrina damaged 558 pipelines in 2005, and 2011 flooding in Montana did $135 million worth of damage to an ExxonMobil (NYSE:XOM) pipeline.
- Higher temperatures are melting permafrost earlier each year, shortening the amount of drilling and exploration that can be done on the Alaskan tundra.
- Oil refineries need large amounts of water to operate, leaving them vulnerable to drought.
- Port terminals for shipments of oil, coal, and natural gas lie along the Gulf Coast and the eastern and western seaboards. These hubs are vulnerable to weather events such as storms, flooding, and rises in sea level.
- Thawing of permafrost shifts the ground and damages pipelines, roads, and rail lines. All crucial for transportation.
- Water levels on the Mississippi River got so low in 2012 that plenty of barge shipments carrying fossil fuels were shut down.
Just recently, the U.S. went through a particularly nasty winter due to some irregularities in the Porlar Vortex. Severe winter weather ripped through the middle of the U.S., disrupting business activity across the board. The weather caused many analysts to project that output from major production states like North Dakota would decline, and those projections were generally well founded as output faltered.
Due to the headwinds, Chevron’s earnings will be lower, which will reduce the company’s stock price and present a possible buying opportunity. Chevron also has a 3.4 percent yield, which could make it a solid long position so long as they can diversify away from oil and gas. Additionally, CAPEX spending will continue to decline as projects finish up and come online (reducing expenditures and increasing production.)
Currently, analysts lean slightly toward a “buy” recommendation with mean price target of around $130 and a low target of $117. However, keep in mind that Chevron has seen nothing but downgrades for the past year and in a world of ever increasing climate risk it could turn bad quickly.
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