The biggest threat to companies like Chevron (NYSE: CVX) might be U.S. oil production. The amount of oil America is pumping might be great enough to distort the market, crash oil prices, and make traditional oil companies unprofitable.
The use of cheaper robotic drilling equipment has allowed U.S. oil producers to add 234 drilling rigs to their operations, Baker Hughes data indicates. There were almost 1,000 rigs (975 to be exact) in operation in U.S. oil fields in February 2018, The Oil Price’s Juliane Geiger noted.
The number of oil rigs is growing at an incredible rate, American drillers added 234 rigs to their operations between February 2017 and February 2018, Geiger estimated. That allowed U.S. oil productions to rise to 10.251 million barrels a day on 9 February 2018 from 9.919 million barrels a day a week earlier.
There are more oil rigs because robots make them cheaper to operate, The Dallas Morning News reported. A rig that used to require 20 roughnecks to operate, now needs just five workers to drill oil, Blomberg noted. That means reduced labor costs, cheaper drilling, and more oil on the market.
American production is growing so fast that the International Energy Agency (IEA) is worried about a new oil glut, Bloomberg reported.
“Fast-rising production in non-OPEC countries, led by the U.S., is likely to grow more than demand,” the IEA predicted.
How OPEC is Driving US Oil Production and creating a new Oil Glut
The previous oil glut has largely been cleared by production cuts by the Organization of Petroleum Exporting Countries (OPEC), the IEA noted. The glut fell from around 300 million barrels in January 2017 to about 100 million barrels in January 2018.
OPEC’s actions might be self-defeating because they encourage countries outside of it to ramp up production with higher oil prices, the IEA pointed out. Oil supplies from non-OPEC countries are expected to rise to around 1.8 million barrels a day in 2018.
Nor is it just the USA, OPEC has to worry; about China has started selling oil futures oil, Bloomberg Markets noted. A grave danger for OPEC is that countries like China will start deploying American technology like robotic roughnecks to expand their oil production.
If China joins the USA in the oil export business, OPEC will be toast. This might happen if the People’s Republic succeeds in converting a large portion of its automobiles to electricity. Oil might become a low-cost commodity which would be very bad news for companies like Chevron.
Can Chevron Survive?
The growing oil glut will have investors wondering if companies like Chevron can survive. Others will ask if stocks like CVX can remain value investments in an age of robot roughnecks and the oil glut.
So far Chevron has managed to thrive in the oil glut era, its year-to-year revenues grew by 21.31% during the 4th quarter of 2017, rising to $34.51 billion for the quarter. More importantly, the year-to-year net income for 4th quarter 2017 grew by 649.64% rising to $3.11 billion.
That made for a net profit margin of 9.02% for 4th quarter 2017, Google data indicates. It looks as if new technology such as iron roughnecks is helping Chevron make money.
How Much Cash Does Chevron Have?
There are some bothersome aspects to Chevron’s financials, they include the lack of cash on hand figures. The most recent cash and short-term investments number I could find for Chevron was $6.654 billion for 30 September 2017, at ycharts which is pretty good.
Still, it would be nice to know how much cash Chevron actually has. One of the main reasons why value investors love oil companies is that they have historically had a lot of cash available. If that is changing it might be time to dump such stocks.
The danger to companies like Chevron is that oil is slowly becoming a bulk commodity with a low value. Companies will still make money in the oil business but profits will be far lower because prices will be low.
Watch out investors oil is becoming just another commodity
That will make oil more like iron, companies will have to drill and sell vast amounts just to make a small profit. Big oil producers like Chevron will survive but they will no longer be the cash cows they once were.
Instead, oil producers like Chevron will be more like miners such as Rio Tinto Plc (NYSE: RIO) with lower share prices and less cash. RIO was trading at $57.82 a share on 14 February 2018 while CVX was trading at $112.14 a share.
The best course for value investors in today’s market is to hold oil stocks but watch them closely. A shakeout that will wipe out many of the companies in the sector is clearly on the horizon.
Oil is becoming just another commodity. When the implications of that development sink there will be a massive sell-off of oil stocks.