Chevron's Spending Spree: With Profit Down, a Move to Exploit High-Priced Crude

Last Updated Dec 10, 2010 11:03 AM EST

Chevron (CVX) will increase its capital spending by $4.4 billion next year, with an aggressive push on the hunt and production of oil and gas. The strategy: take advantage of higher crude prices and erase some of the exploration failures that led to a profit drop last quarter.

Chevron was the only oil major to see its net income drop (albeit it fell only 1.6 percent) last quarter even with a 12 percent rise in crude prices and record oil production at the company. Profits were hit hard by soaring costs from exploration failures and the company was forced to take write-offs on wells in Canada and Turkey. Meanwhile Exxon (XOM) saw its third-quarter profit skyrocket 55 percent.

So where is Chevron putting most of its cash next year? Eighty-five percent will go towards oil and gas exploration and production. That's $22.6 billion. Another $2.9 billion will be spent on downstream, which is the segment where crude is refined, transported and sold to consumers.

Chevron has been in a shift towards more exploration and away from "downstream" operations for more than a year. Not only is that strategy continuing, it appears to be accelerating. Chevron cut its downstream budget 14 percent from 2010. Overall, its spending on refining, transportation and marketing of fuels will be 29 percent lower than it was just two years ago.

Its CEO John Watson, who took over in September 2009, is clearly betting on exploration and Asia's insatiable energy appetite to pump up profits in the long term. The company will direct much of its exploration and production dollars to developing its two massive liquid natural gas projects in Western Australia. Those projects will supply Asia with LNG, much of which has already been locked into long-term contracts.

Chevron isn't walking away from the Gulf of Mexico either even with all of the hand-wringing over stricter regulations post-BP spill. Offshore drilling projects outside of the Gulf of Mexico are also on the spending docket, including in offshore Brazil, United Kingdom and Nigeria. There is some onshore oil development, namely in the Canadian oil sands.

Photo from Chevron