Upcoming Chevron CEO Will Continue to be Challenged With Lower Oil Prices

If energy company CEOs thought their problems with bottoming oil prices were over, they’ve got another thing coming.

Come February, when Chevron’s new chairman and chief executive, Michael K. Wirth takes the helm, this problem will still be at the top of his list.

Wirth, 56, replaces John S. Watson, who will retire from the company and its board on Feb. 1, after 37 years at Chevron, including eight years as chairman and CEO.

Wirth also has had a long career at Chevron, joining the company in 1982 as a design engineer. Since that time, he advanced through a number of engineering, construction and operations positions. Currently Wirth is executive vice president of midstream and development, and last February was named vice chairman of the board of directors.

“Mike is a proven leader who is ideally suited to lead Chevron into the next chapter of our history,” Watson said in the company’s announcement. “He has the right values, knowledge and experience, and has established a strong record of accomplishment in his 35 years with the company.”

For large oil and gas companies such as Chevron, “changes in CEO leadership usually mean very little for the strategy of the business,” says Pavel Molchanov, energy research analyst at the Houston office of Raymond James.

“The classic analogy is that it’s a supertanker that does not turn easily, as opposed to companies in other industries where management turnover can lead to pretty dramatic changes,” Molchanov says.

The people who are chosen to be CEOs of supermajors almost always have spent essentially their entire career at those companies.

“In the case of Wirth, he’s worked at Chevron for 35 years—he’s a Chevron lifer,” he says. “That’s very different from what we see in, for example, the technology sector, where executives typically moving laterally to get a promotion at a different company.”

Why did Wirth get the job over other candidates? While Molchanov has never met Wirth, he does know that Chevron clearly has a fairly rigorous promotion process.

“These are companies with a very ingrained culture, and people who rock the boat usually do not do well career-wise,” he says. “So when I say that no matter who the new CEO is, the strategy of the business typically changes very little, that is precisely why the top people get chosen.”

The biggest challenge for any oil producer right now is the fact that oil prices are relatively low, Molchanov says. Prices are “certainly better” than they were 18 months ago, but half the price they had been three to five years ago when oil prices were close to $100 a barrel.

“There’s no escaping that for any oil producer—no matter how big and no matter where they are located geographically,” he says.

Chevron has a strong balance sheet, so the company has the ability to withstand a long period of low oil prices, even as a lot of smaller oil producers have gone bankrupt. Some of the other large-caps in the industry have been forced to cut dividends, but Chevron did not do that—it has consistently protected its dividend.

On the other hand, Chevron’s capital spending has been cut, and “cut very severely.”

“When oil prices fall by 50 percent, even with cost reductions there is simply not enough cash flow for these companies to invest in all of the things they might want to invest in,” Molchanov says. “There are still a lot of projects that Chevron could theoretically develop, but with the cash flow limitations, they now have to be much more selective than before.”

For example, the company has put more capital in the Permian Basin in West Texas and also in Kazakhstan. However, a project in British Columbia called Kitimat that Chevron “has been thinking about for many years has been put on the back burner”—there’s just not enough of an economic return to invest in it.

Overall, he says, Chevron’s business model won’t change dramatically due to lower oil prices. Whether Wirth will feel confident enough to take any sizable risks is another story.