Chevron's (CVX) Project Kilby, a planned 2.7-gigawatt power project for Microsoft's (MSFT) data centers in West Texas, could be expanded over time as Microsoft's power needs exceed the project's initial capacity, UBS Securities said following meetings with the company at an industry conference.
UBS said in a Tuesday note that the phased and modular nature of the project would allow for incremental expansion and noted that the 20-year agreement with Microsoft is longer than many comparable contracts. The brokerage added that the project could become one of the largest behind-the-meter power developments to date.
Chevron views rising power demand as a structural market shift and expects the business to compete for capital by targeting mid-teen returns. The project has been incorporated into the company's existing capital guidance, and management sees the potential for the business to generate billions of dollars in free cash flow over time.
Chevron is also leaning into the exploration space to reduce costs and improve the probability of success when drilling its first exploration well, the note added.
UBS has a buy rating on Chevron with a price target of $220.
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