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Chevron Poured More into U.S. Onshore Under Watson’s Leadership

If and when John Watson decides to step down as chairman and CEO of Chevron Corp., he would be leaving the company in better financial shape than it was a year ago and with a bigger focus on the Permian Basin, now its No. 1 U.S. onshore prospect.

The Wall Street Journal on Tuesday first reported Watson, 60, would retire from the San Ramon, CA-based supermajor as soon as September. A new chief had not been finalized by the board, and Watson was expected to remain through a transition, sources said.

Watson, who has helmed the company for seven years, joined Chevron in 1980 as a financial analyst. He guided Chevron through a tumultuous period following the oil price debacle in late 2014, turning around a year-ago loss during the second quarter, with Permian-led production increasing and operating costs falling.

During the most recent conference call, upstream chief Jay Johnson had stressed the importance of the Permian to Chevron’s future growth. At the end of June Chevron was running 13 rigs in the West Texas play, and Johnson said a rig would be added to the West Texas region every eight to 10 weeks, with 20 expected by the end of this year.

Watson led the charge for Chevron back into the Permian, where the company has held leases for decades. He also has overseen expensive, long-term mega-projects that include the cash-sucking twin liquefied natural gas (LNG) export hubs in Australia, Gorgon and Wheatstone.

Chevron already has ramped up its the massive Gorgon LNG project, with Wheatstone, at 13.4 million metric tons/year, coming online this year.

The LNG projects, and other endeavors in the global deepwater, pushed Chevron’s free cash flow to the red in 2013; a year later, oil prices crashed, pushing the Big Oil operator and its fellow explorers into a corner.

Led by Watson, Chevron responded to the downturn by paring capital expenditures (capex), reducing the workforce, dropping drilling rigs and working with vendors, an ambitious effort to pace itself until commodity prices were more accommodating. Final investment decisions were put on the backburner.

With oil prices not budging, Watson a few months later said, “We're quite sober about prices in 2015,” but investment cuts by industry were expected to "bring supply and demand into balance in 2016," moving oil prices upward. "I don't think $50 oil is sustainable.”

Sustainable they have been in the two years since. During the company’s annual analyst day in March, Watson pivoted, with a renewed focus on shorter-cycle rewards, led by the Permian.

The No. 2 oil major after ExxonMobil Corp. years ago had begun major oil and gas projects "premised on higher prices," Watson said in March. "A lot of change is taking place in the business, and we are adapting to a lower price environment. We are improving efficiencies, and those types of benefits are sustainable."

Chevron expects to spend about $26 billion for capex this year, 25% less than in 2015. In 2017-2018, $17-22 billion is allocated.

"Industry conditions are tough right now, with low oil and natural gas prices," Watson said five months ago. "We believe markets will improve, and we'll be well positioned when they do." He added that prices were “not going back to $100 oil anytime soon.”

The top candidate rumored to take over is Michael Wirth, 56, who was named vice chairman earlier this year, according to the Journal report.

According to filings, Watson would be eligible to receive $13.5 million if he were terminated after a change in control as of the end of 2016. At the end of fiscal 2016, Watson also had accumulated pension benefits of $45.4 million.

“This is somewhat of a surprise as there was no previous hint of this and no obvious succession plan outlined,” said Tudor, Pickering, Holt & Co. analysts of Watson’s rumored departure. “It is not clear what has prompted this decision, but he would be leaving the company in good order with the Permian ready to take off and the LNG projects on the cusp of moving into free cash flow generation.”

Replacing Watson with Wirth “is somewhat of a surprise also, given Chevron has the lowest contribution from downstream of the supermajors,” analysts said.

“Chevron has talked about further downstream and chemicals investments on the U.S. Gulf Coast, which could integrated into its future Permian growth. One area where the strategy may change is with regards the response to climate change,” they noted. “Chevron has been the supermajor that has been most vocal against a tax on carbon, and Watson also recently said he isn’t worried about peak demand for at least the next 20 years.”

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