Asset sales, job cuts and less spending are in the cards for Chevron Corp. (NYSE: CVX) in 2016 after tanking commodity prices led to a $588 million net loss for fourth-quarter 2015.

That is a 117% swing from reported 2014 earnings of $3.5 billion.

Upstream earnings were hit the hardest, with losses of $1.95 billion compared to earnings of $432 million a year earlier as project cancellations and impairments, lower gains on asset sales and low oil prices took their toll.

The company’s downstream operations fared better, bringing in $496 million for the quarter. But that was also down about 44% from $889 million in 2014. Margins on refined projects only partially offset losses due to the absence of asset sales that lifted profits in 2014.

But top executives for the San Ramon, Calif. -based company, one of the world’s top oil and gas producers, are pressing forward with major upstream projects—including its massive Australian Wheatstone and Gorgon LNG projects. The company is also working to become more efficient in the Permian Basin and other areas as it works to boost production and reserves.

The company is treading cautiously and aggressively reducing investment given uncertainties. Chevron warned that 2016 could see:

  • Additional layoffs of another 4,000 people;
  • Delayed financial investment decisions, including for the Tengiz expansion project in Kazakhstan; and
  • Budget guidance of $25 billion to $28 billion could fall on the lower end—or below that.

“The biggest change between what we will spend this year and next year is really the ramp down from major capital projects,” Chevron CEO John Watson said on a Jan. 29 conference call. The $6 billion being spent on LNG projects this year will drop to less than $2 billion in 2017. “You gain $4 billion right there. Our flexibility grows as time goes by.”

It also helps to have a strong balance sheet, which he said is a necessity for a long-cycle business.

For now, the capital budget for 2016 has been set at $26.6 billion.

“We believe demand will continue to grow. The larger wildcard or uncertainty is supply,” Watson said. He pointed out that non-OPEC liquid fuel production was “much more resilient in 2015 than most predicted. With the significant contraction in global investment caused by low prices, the world would see supplies drop off.”

Until the oil market rebalances, prices will remain constrained and the financial damage to the energy sector will continue, Watson said.

However, Chevron will have the advantage when prices rebound, he said.

“We are well positioned when the market does rebalance and prices began to rise because of the leverage that we have and our growing production profile,” Watson said.

Pump It Up

Despite the squeeze on finances, Chevron’s oil production was up and its LNG projects are likely to come online in the first quarter of 2016.

Chevron increased its net oil production to 2.67 million barrels per day (MMbbl/d) from 2.58MMbbl/d in fourth-quarter 2014 as projects in the Permian Basin, the Lianzi Field offshore Congo and Bangladesh ramped up.

“We advanced our upstream major capital projects,” Watson said in a statement. “We had first production from two deepwater projects in Africa, and ramped up production from Jack/St. Malo in the deepwater Gulf of Mexico and our shale and tight resources in the Permian Basin. We made significant progress on our LNG projects in Australia, in particular the Gorgon Project -where we expect to be producing LNG within the next few weeks.”

Net gas production rose 6% to 4.07 billion cubic feet per day (Bcf/d) as work progresses on LNG and other projects.

  • Gorgon: The first cargo for Train 1 is expected this quarter. All of the modules have been delivered and construction is ongoing for Train 2 and Train 3;
  • Wheatstone: All Train 1 modules are on site, LNG loading jetty is complete and the trunkline is ready for service. Six of nine wells are complete with first LNG cargo expected in mid-2017.
  • At Angola LNG, gas will be introduced to the plant later this quarter with first LNG cargo in the second quarter. Mafumeira Sul in Angola, Bangka in Indonesia and Alder in the North Sea are progressing toward expected start-ups later in the year, Watson said on the call.

“Successful completion and start-up of these and other major capital projects will translate into significantly lower capital spending, higher production and growing cash generation in the months ahead,” Watson said.

The company plans to grow production by up to 4% this year, but that could change depending factors in the Middle East, cash flow and A&D activity.

Inactive & Dormant

Chevron’s deal making still managed to impress in 2015.

Asset sale proceeds were $6 billion in 2015. Chevron recorded more than $5 billion in asset divestment proceeds in 2014.

The company has $5 billion to $10 billion more to sell, including shallow-water and downstream and other assets that the company has not yet disclosed.

Doug Leggate, an analyst for Bank of America Merrill Lynch Global Research noted that “everybody and their grandmothers seem to want to sell assets right now.”

Leggate asked how Chevron sees the depth of the A&D market.

Watson: “ I think it’s a terrible market to be trying to sell most assets out there, particularly oil-related assets.”. He acknowledged that there will be some tough-to-execute opportunities and “If we can’t execute them we won’t sell them.”

But he believes the company has received good values on assets sold in the past. Chevron’s sale of its stake in refiner Caltex Australia fetched $3.7 billion in 2015.

In the meantime, Chevron will continue chasing cost reductions.

Chevron has taken a longer view on deepwater developments, for instance. While rig rates have fallen, deepwater costs have not come down as fast as onshore, Watson said. Chevron’s impairment charges in the fourth-quarter included a write down for the canceled Buckskin and Moccasin projects in the Gulf of Mexico.

Watson said for now Chevron’s money is better spent elsewhere, notably in the Permian.

Other tough choices are being made.

The company had more success in the U.S. than internationally due to contracts and a competitive environment.

“We will be working additional efficiencies,” Watson said, adding layoffs are approaching. “Our employee count was down about 3,200 between the end of 2014 to the end of 2015. There are another 4,000 coming this year.”

He added the company is being careful to keep key people in position for the organization’s long-term prospects.

“The reality is that activity is likely to be lower and we do have a number of projects that we will be ramping down,” Watson said. “We’re going to work to be fair about how we do that.”

Velda Addison can be reached at vaddison@hartenergy.com.