Today, Chevron's geothermal operations in Indonesia have a combined operating capacity of 647 megawatts. Chevron also owns a 40% interest in the Philippine Geothermal Production Company, which operates geothermal facilities in the Laguna and Batangas provinces. Those fields have a combined generating capacity of another 692 megawatts. Chevron's Indonesian and Philippine operations are the main reason the company is the second largest geothermal owner and operator in the world. It's also those Indonesian and Philippine operations that are up for sale.
The effect of the divestment for Chevron
Although Chevron doesn't break down the revenue it gets from geothermal in its quarterly or annual reports, other geothermal companies have released their financial reports, and the extrapolated revenue isn't meaningful compared with that of Chevron's oil and gas or downstream operations.
Geothermal producer Ormat Technologies, for example, realized $376 million in revenue in 2015 from its electricity segment, which owned and operated 697 MW of geothermal plants. Ormat's electricity segment had an adjusted EBITDA margin of 60% for the year. Given that Chevron's share of its Philippine operations and Indonesian operations add up to 923.8 MW and assuming similar adjusted EBITDA margins and revenue per watt, Chevron's adjusted Asian geothermal revenue would be around $500 million a year and the segment's adjusted EBITDA would be around $300 million a year. That compares with Chevron's 2015 revenue of $129 billion and EBITDA of $19.6 billion.
The divestment would help bridge Chevron's cash flow gap, however. Because of weak crude prices and needed investment to finish its Gorgon and Wheatstone projects, analysts expect Chevron to have negative-$15 billion in free cash flow this year. Chevron will also have to pay approximately $8 billion more in dividends. Selling its non-core geothermal assets for potentially $3 billion would help Chevron preserve its balance sheet and plug its cash flow gap.
Pragmatic approach torenewable energy
Chevron's potential sale of its Asian geothermal operations illustrates the company's pragmatic approach to renewable energy.
Chevron realizes that having a renewable energy strategy is necessary. Demand growth for crude is expected to wane in the coming decade as clean transportation alternatives such as electric cars powered by renewable energy sources become more economically competitive. The company has invested into solar, wind, and biofuel technology as a result. Chevron has also in some ways moved beyond crude by producing more natural gas and LNG as a percentage of total production.
At the moment, however, Chevron is in a tough situation in terms of free cash flow given the low crude prices and the needed investment finish the Gorgon and Wheatstone projects before they become productive. Given that Chevron's geothermal operations haven't grown much since the 1990s, and the company could fetch a potential valuation of 10 times adjusted EBITDA (which is roughly in line with Ormat Technologies' valuation) for the assets, management concluded that there wasn't much more upside to the geothermal assets in Asia, and the capital garnered could be better used elsewhere.
Although it put the bulk of its geothermal assets for sale, Chevron could still play a leading role in the geothermal energy sector. By being one of the leading operators in geothermal for so long, Chevron has the skills to build more plants in the future in other locations. Analysts estimate that the potential for geothermal energy is over 10 times the current global installed capacity of 13 GW, meaning that geothermal has substantial growth prospects.
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The article This Potential Asset Sale Reflects Chevron's Pragmatic Approach to Renewables originally appeared on Fool.com.
TMFJay22 has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chevron. The Motley Fool owns shares of Ormat Technologies,. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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