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Chevron Likes Shale but Is Focused on Value, Says CEO

Chevron Corp. plans to continue to make acquisitions in unconventional plays around the world but the company likely will go it alone when it does, CEO John Watson said Friday.

Watson spoke with financial analysts during a conference call to discuss the company's 2011 and 4Q2011 performance. In the U.S. onshore Chevron has begun delineating a slew of unconventional fields that it acquired last year from Atlas Energy Inc. (see Shale Daily, Nov. 10, 2010). Watson indicated that the company had "supplemented" the Atlas acquisition last year with "more acreage in the Marcellus."

Asked if the company might be considering additional acquisitions in the coming year, the CEO didn't answer the question directly. "We don't have to do acquisitions but we are able to do them with the balance sheet we have," he said. "We have made some small acquisitions in the Marcellus," and the company plans to continue to make bolt-on purchases when it's able.

"We're very positive on shale," he said. "The shale gas business was built by independents because they had [U.S.] land departments," something that the majors didn't have. "The majors got in by buying our way in." But "as much as we like rocks, we're focused on value."

Chevron would have made more onshore purchases but in many cases, unconventional land is too pricey or the deals have not been to the company's tastes, said Watson. "Many companies plunge in with big dollars. In our view, we had strict criteria, with a low cost of doing business and a substantial carry to push through in today's gas market." But Chevron wants to gain entry "in a way that we can generate value."

One consideration in taking on unconventional projects in the United States is "organizational capacity," said Watson. "When we acquired Atlas, we picked up very good people and that was very helpful to us. Manpower is at a premium, and that's an important part..."

Becoming a joint venture (JV) partner with a driller in North America isn't a priority, he said.

"There are two aspects to a JV," said Watson. "One is coming in and carrying the operator and paying a disproportionate level of costs, and with a gas market where it doesn't work" that's not doable. The Atlas acquisition came with a carry, he noted. "To come in as a nonoperator is not our approach. We want some degree of control...We looked at a lot of JVs but you had to come in with money and have the pace and the activity dictated by the operator." Chevron wasn't interested in taking part in that that type of transaction.

"I'd like to point out that we have eight million acres of shale around the world," said the CEO. "It's not just Marcellus and Utica shales, but we also are working in West Texas and otherwise...We feel pretty good about our portfolio. We have opportunities overseas...We're drilling a shale well in Poland, a second in the Duvernay Shale in Canada...We're not...against things. We've had a lot of acreage that's been held for a long time; the Delaware Basin holds promise."

Chevron reported a profit of $5.12 billion ($2.58/share) in 4Q2011, down 3.2% from $5.3 billion ($2.64) in 4Q2010. The results, which fell below Wall Street estimates of $2.84/share, were blamed on a decline in the refining and marketing results, which had been expected. Revenue in the final period jumped 11% to $60 billion.

The producer added about 1.67 billion boe in reserves last year, which is equivalent to triple its annual production, said Watson. The biggest source of the newly booked reserves came from sanctioning the massive Wheatstone liquefied natural gas project in Australia. Other additions came from the Marcellus and Utica shales, as well as a "multiple" projects in the deepwater Gulf of Mexico.

Chevron produced 2.64 million boe/d in 4Q2011 and was able to overcome a 5.3% year/year decline in output in part because of higher oil prices. Total 2011 output dropped 3.3% from 2010 to 2.67 million boe/d. This year's gas and oil production is expected to be flat from 2011 at about 2.68 million boe/d, assuming a $111/bbl price for oil, said Watson. Long-term, Chevron's production is forecast be up by 4-5% a year from 2014-2017.

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