Chevron recently announced plans to divest its 40% interest in Oil Mining Leases (OMLs) 86 and 88 located in Niger Delta Basin, offshore Nigeria. The company completed the sale of a similar interest in two Nigerian shallow water offshore oil blocks, OML 83 and 85, to local firm First Exploration & Petroleum Development Company Limited (First E&P) in February of this year. Chevron did not reveal the amount it is expecting out of these divestments, but we believe that it is a move in the right direction for the following reasons.
Operating conditions are not very favorable for international oil and gas companies in Nigeria. Incidents such as theft of crude oil by organized gangs and pipeline attacks by vandals are common. In addition, there is a lot of uncertainty for upstream oil companies in the country because of the tax regime, which could change under the proposed oil bill. Chevron is therefore not alone in acting to reduce its exposure in Nigeria. Its peers like Shell, Total, ENI, and ConocoPhillips have signed similar deals over the last couple of years.
The move also falls in line with Chevron’s current divestment plan that is now targeting cumulative asset sales worth $15 billion by 2017, up from $10 billion last year. In 2014, the company generated proceeds of around $6 billion from asset sales, which leaves scope for another $9 billion worth of deals to be executed over the next couple of years. Chevron also plans to slowly reduce its gross annual capital expenditures from around $40 billion last year to $30 billion by 2017. This, coupled with increased asset sales, should help the company reduce its net capital expenditures, thereby enhancing its free cash flows amid depressed commodity prices.
Oil and gas companies have seen their cash flows dry up significantly because of the precipitous decline in global crude oil prices over the past 12 months. For instance, Chevron reported first-quarter cash flows from operations of just around $2.3 billion, barely exceeding the dividend payout of $2 billion. This situation has led oil companies to claw back on capital spending and increase their divestment program in order to reinforce their free cash flows to cover shareholder distributions. Therefore, we believe that the sale of Nigerian assets will not only reduce Chevron’s operating risk but also help boost its free cash flows to cover the dividend program in the short to medium term.
- How Two Sisters Turned Their Dream Into A Million-Dollar Business
- A Simple Rule For Achieving Balance And Success In Business