Chevron stock concerns as reserves hit decade low
On Tuesday, Chevron Corp (NYSE: CVX ) disclosed that its oil and gas reserves have dwindled to their lowest levels in over ten years, underscoring the critical nature of its planned acquisition of Hess Corporation (NYSE: HES ).
The deal, however, has encountered legal obstacles due to a dispute with Exxon Mobil Corp (NYSE: XOM ) over rights to the coveted Guyana oilfields.
Reserve replacement, a vital indicator of future production potential for energy firms, has seen a significant decline for Chevron. The company's reserves dropped from 11.1 billion barrels of oil equivalent at the end of 2023 to 9.8 billion by the end of 2024, partly due to asset sales. This 61% decrease has raised concerns among analysts about Chevron's long-term output capabilities.
Scotiabank (TSX: BNS ) analyst Paul Cheng told Reuters that the low rate of reserve replacement is a "red flag" for the company's prospects. Over the past decade, Chevron's reserve replacement ratio averaged 88%, with the organic reserve replacement ratio—a measure excluding acquisitions and sales—standing at 45%. A ratio below 100% indicates that the company is not replenishing its reserves as quickly as they are being depleted.
The ongoing court battle initiated by Exxon and CNOOC (NYSE: CEO ) Ltd (SHA:600938), who argue they have the right of first refusal to Hess's share in the Guyana project, has stalled Chevron's strategic move. If successful, the acquisition would enhance Chevron's position by granting it a 30% stake in the Guyana oilfields, which are estimated to contain more than 11 billion barrels of discovered recoverable resources.
Chevron CEO Mike Wirth emphasized the company's focus on developing high-quality assets, including those in the Gulf of Mexico. He expressed confidence in October 2023 that the merger with Hess would significantly extend Chevron's resource inventory visibility into the next decade.
The acquisition, valued at $53 billion, was announced in October 2023, promising to bolster Chevron's future prospects. Meanwhile, Exxon, which has also faced challenges in replacing its reserves in 2023 and 2022, has yet to report its replacement ratio for 2024.
This difficulty in reserve replenishment partly motivated Exxon's acquisition of Pioneer Natural Resources (NYSE: PXD ) last year, making it the largest oil producer in the Permian Basin.
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