70% of planned upstream projects will generate production in 2 years

California-based Chevron Corp. (ticker: CVX) announced its 2017 capital budget Wednesday.

The company will cut its capex spending for the fourth consecutive year as it focuses on short-cycle, high-return investments, according to the company. Including $4.7 billion in affiliate expenditure, Chevron’s 2017 budget will be $19.8 billion, the company said in its press release.

The 2017 capital budget represents about a 15% decrease year-over-year, and is 42% lower than the company’s 2015 capital budget.

Short-cycle

“Our spending for 2017 targets shorter-cycle time, high-return investments and completing major projects under construction. In fact, over 70 percent of our planned upstream investment program is expected to generate production within two years,” said CVX Chairman and CEO John Watson.

“Construction is nearing completion on several major capital projects, which are now online or expected to come online in the next few quarters. This combination of lower spending and growth in production revenues supports our overall objective of becoming cash balanced in 2017.”

~$2 billion heading to Permian

In the company’s upstream business, approximately $8.5 billion of planned capital spending relates to base-producing assets, including about $2.5 billion for shale and tight investments, the majority of which is slated for Permian basin developments in Texas and New Mexico.

~$2 billion for Gorgon and Wheatstone, $3 billion for Tengiz in Kazakhstan

Another $7 billion of the planned upstream program is related to major capital projects currently underway, including approximately $2 billion toward the completion of the Gorgon and Wheatstone LNG projects in Australia and $3 billion of affiliate expenditures associated with the Future Growth Project-Wellhead Pressure Management Project (FGP-WPMP) project at the Tengiz field in Kazakhstan.

Global exploration funding accounts for approximately $1 billion of the total upstream budget, and the remainder is primarily related to early stage projects supporting potential, future development opportunities.

Lower capex sets up positive free cash flow in 2017

A note from UBS Thursday estimated that the lower capital spending from Chevron would allow the company to realize positive free cash flow next year. “We forecast [Chevron] will generate a FCF surplus (after dividend) next year of ~$3.3 billion based on its 2017 capex budget at strip and be FCF neutral at a Brent price of ~$48 per barrel,” UBS said.

The bank believes the company will generate a free cash flow deficit of about $10.5 billion in 2016 after its dividend.