By Braden Reddall
March 21 (Reuters) - Chevron Corp, after years ofliving in the shadow of Exxon Mobil Corp, has grownaccustomed to having to punch above its weight, and it has nowlanded a notable blow against another big oil company.
Though it ranks fourth in oil and gas reserves among theworld's non-government-controlled producers, the Californiamajor recently seized the number two spot from Royal Dutch ShellPlc in terms of stock market valuation.
Chevron's steady climb underlines the fact that the totalreserves number matters less today than proportion of oil versusgas.
While average crude oil prices hit a record high in 2012,last year also saw U.S. natural gas prices plumb a10-year low because of a glut of production from North Americanshale rock that has shaken up the global market for gas.
Proved reserves include estimated crude oil in the ground aswell as natural gas converted into "barrels of oil equivalent"(boe) for easy comparison. Along with current levels ofproduction and prevailing oil and gas prices, reserves are howaccountants and analysts derive an oil company's book value.
Shell's end-2012 reserves are 54 percent natural gas, whilethe equivalent figure for Chevron is only 43 percent.
In addition, more than half of Shell's worldwide productionis natural gas, whereas gas represented less than a third ofChevron's 2012 output.
Because of that, among other reasons, Chevron generatedearnings from oil and gas production of $23.8 billion, comparedwith $22.2 billion in "upstream" earnings for Shell. Its "oily" resource base also helped it beat the other majors, includingExxon and BP Plc, in earnings per barrel.
"The key is Chevron's different production," said JasonGammel, a London-based analyst at Macquarie. "Chevron generatesjust as much cash, and at the end of the day that's whatmatters."
Looking at the comparative reserves, Shell's ability torapidly switch to more liquids production in response to pricesis more constrained than that of the other companies.
OIL-LINKED CONTRACTS
George Kirkland, head of Chevron's upstream business,acknowledges his company is becoming more gas-focused over time,with huge projects starting up in Australia and Angola set tomore than double its LNG production to 460,000 boe/day from2017.
Kirkland predicts that in the future Chevron's actual outputwill be about 60 percent oil and 40 percent natural gas, but henoted that much of the LNG has already been sold for long-termcontracts linked to oil prices.
"When you look at the revenue stream, it will still lookvery close to 80-20 oil, because so much of this gas coming onis sold with an oil linkage," Kirkland said in an interview lastweek. "I think we showed that last year."
So all gas is not the same, as Exxon has found out the hardway ever since its $30 billion purchase of XTO in 2010. Theaddition of XTO registered in a clear tick up in gas reservesthat year for Exxon, despite the size of the Texas giant'sportfolio.
EXXON FALL-OUT
Analysts cite Exxon's big bet on shale gas with XTO as partof a strategic direction that allowed its stock to underperformits smaller U.S. rival over the past half decade, with Chevronshares up 45 percent versus just 3 percent for Exxon.
"As Exxon Mobil suffers the fall-out from a decade of anexcessively low oil price planning assumption, lack ofexploration, and a huge bet on US natural gas, Chevron isclearly marching towards a position of the world's number 1 oilcompany," Deutsche Bank analyst Paul Sankey wrote last week.
A big risk for Chevron, Sankey added, is the amount of moneyit is having to fork out to compete with Exxon: Chevron'scapital budget for 2013 is $36.7 billion, only $1.3 billiondollars short of Exxon's spending this year.
But the outlook for Chevron looks more promising, withannual production growth of between 4 percent and 5 percentexpected between 2014 and 2017, Gammel said.
And Kirkland put investors' minds to rest last week when heexplained that 98 percent of the projects delivering that growthare in design, construction or production.
Chevron shares hit a new record high of $120.98 on Thursday.
(Reporting by Braden Reddall in San Francisco; Editing byPatricia Kranz and Chizu Nomiyama)