Chevron's Microsoft Data Center Deal Was a Bigger Story Than Its Earnings. Here's Why.
Key Points
Chevron entered a 20-year power purchase agreement to supply electricity for a new data center in Texas.
The agreement is part of Project Kilby, which utilizes GE Vernova's gas turbines to power the data center.
The deal gives Chevron a stable, diversified revenue source through a take-or-pay power purchase agreement.
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Chevron (NYSE: CVX) posted stellar second-quarter results at the end of July, beating the street's estimates thanks to higher oil prices, increased production volumes, and strong margins.
However, even bigger news is that Chevron has entered into a 20-year power purchase agreement (PPA) to build a natural gas-powered facility to power Microsoft's (NASDAQ: MSFT) artificial intelligence (AI)-focused data center in Texas. The move comes as hyperscalers scramble to find energy for the ever-growing data center footprints.
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For Chevron, it locks in long-term revenue, insulating it from volatile commodity prices. Here are details of its recent deal and what it means for Chevron investors.
Image source: The Motley Fool.
Breaking down Chevron's data center deal with Microsoft
On June 22, Chevron inked a 20-year take-or-pay power purchase agreement with Microsoft to provide electricity for a Microsoft-operated data center. The agreement is part of Project Kilby, in which Chevron (through its subsidiary Energy Forge One), Engine No. 1, and Microsoft are working together to develop roughly 2.67 gigawatts (GW) of on-site power.
As part of this project, most of the power will come from GE Vernova's gas-powered turbines and related infrastructure. Additional capacity will come from Solar Turbines, a wholly owned subsidiary of Caterpillar. The modular approach enables the project to add capacity over time, and the power plant is expected to begin supplying power by 2028.
Chevron plays a key role as a co-investor and developer through Energy Forge One, as well as a fuel provider. Chevron will supply natural gas from its Permian Basin production field directly to the power plant, while Energy Forge One will manage the long-term operations, including maintenance and water management systems.
The deal adds a diversified, stable revenue stream for Chevron
The move into AI data centers provides Chevron with a targeted, high-margin commercial expansion. This behind-the-meter data center allows Chevron to use associated natural gas, a byproduct of crude oil drilling. Because of limited capacity, companies often have to burn off excess gas, but now Chevron has a place to redirect it as hyperscalers seek baseload energy from natural gas turbines.
The 20-year PPA take-or-pay contract provides Chevron with stable revenue over the life of the contract. The take-or-pay model ensures Chevron recovers its investment and eliminates upstream gas price volatility, while Microsoft secures scarce energy decades in advance.
The AI data center build-out continues to reveal the true bottleneck for hyperscalers: reliable power. This deal helps Chevron add another revenue stream benefiting from AI's secular growth and could pave the way for more deals in the future. It's the kind of news long-term investors should pay closer attention to.
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Courtney Carlsen has positions in Chevron, GE Vernova, and Microsoft. The Motley Fool has positions in and recommends Caterpillar, Chevron, GE Vernova, and Microsoft. The Motley Fool has a disclosure policy.
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