Chevron floats $5B bonds

on Mar 01 in Oil Exploration, Oil Market tagged by Trevor Hicks

Chevron is borrowing $5 billion with various maturities and interest rates raning from 3 years at 3.45% to 10 years at 4.95%.

Why would they do this?  Here’s what I can think of:

1) Simple adjustment of capital structure, equity investors expect at least 6 to 8% returns, the cost of debt is not only much lower in nominal terms, but because of the tax deductibility of the interest payments, the servicing costs on this debt is actually less than the dividend payments the firm is making on equity with its current yield at 4.3%.  The banks really are desperate to lend but also can’t tolerate raising their risk profile.  I was in a meeting with Andrew Gould at Schlumberger back in December and he mentioned that banks were fairly beating down his door trying to convince him to borrow a billion or two.  When you get rates so cheap that you could use the money to buyback stock and have the transactions actually increase cash flow, well, you don’t need an MBA to be able to figure this one out.

2) They want to fund an acquisition.  Acquisitions are typically offered as cash or equity deals.  You want to buy with equity when your stock is expensive and with cash when cash is cheap.  The P/E ratio for Chevron stock is 5.2.  Both cash and equity are ridiculously cheap - cash is the best option.

3) They want to fund capital investment.  Firms like Chevron can quit comfortably maintain positive cash flow at $40 oil.  OK, maybe not comfortably, but they can do it without slashing to the bone.  There are plenty of players around the world holding resources that don’t have quite the same cash flow or access to credit.  Chevron can lever its superior balance sheet to acquire assets or fund exploration campaigns with partners that are forced to accept unfavorable terms because they need cash.

4) Chevron needs cash.  I consider this unlikely given the interest rates.

Overall I take this as a bullish sign for the oil industry, it’s more likely that this means Chevron is ready to invest than it means Chevron is in trouble.