Chevron Is All About Stability and Growth

Chevron Corporation

(Photo credit: Wikipedia)

Chevron (NYSE: CVX) hit a new 52-week high two weeks ago. Chevron is a stable stock, with a beta of 1.17. The oil and gas company operates in two main systems, upstream and downstream, which include exploration, development and production as well as refinery and marketing. Chevron is the second largest oil and gas company in the U.S., after ExxonMobil(NYSE: XOM), and is ranked fifth globally. ExxonMobil ranks second globally in terms of sales, with BP (NYSE: BP) being the largest oil and gas company.

Chevron, along with Williams Cos. and WPX Energy, is facing a lawsuit filed by six Pennsylvania families, claiming a nuisance caused by the oil and gas companies. Bloomberg reported:

The families say the companies’ activities have ruined the “quiet use and enjoyment” of their homes and caused emotional damages including anxiety and fear. The home owners seek unspecified compensatory and punitive damages for the effects of toxic chemicals, noise and odour from nearby gas wells, according to a copy of a complaint provided by the families’ lawyers. It could not immediately, be verified in court records.

I do not think this should be a major impact on the company’s performance going forward, since the families are only seeking for damages and not an injunction, as per the report.

Earnings flat but acceptable

Chevron announced its Q1 2013 results on April 26, beating analyst estimates. The company reported revenue of $56.82 billion, which beat the consensus estimate of $56.46 billion. Chevron’s EPS for the quarter came at $3.18 per share, above the analyst estimate of $3.09, while production increased to 2,650 mboe/d (millions of barrels per day), compared to the amount reported in Q1, 2012, of 2,631 mboe/d.

Despite beating the analyst estimates on revenue, the company reported a decline from last year’s revenue of $61 billion. Earnings improved from $3.15 to $3.18 per share. The company repurchased $1.25 billion worth of shares during the quarter, and expects to purchase the same amount during the second quarter.

Chevron’s main competitor, ExxonMobil, missed a number of analyst estimates, but earnings outperformed expectations. The company reported revenue of $108.8 billion, down from last year’s $1 billion, while analysts had estimated $109.5 billion. Production came at 4,395 mboe/d down from 4,553 reported in Q1, 2012, and below the analyst estimate of 4,412 mboe/d. However, ExxonMobil’s EPS was up $0.12 from last year’s $2.00 per share, and easily trumped the analyst estimate of $2.05 per share.

ConocoPhillips (NYSE: COP), another U.S oil and gas giant with a market cap of about $72 billion, reported a flat EPS of $1.42, but missed analyst estimates on revenue. The company reported revenue of $12.25 billion compared to the analyst estimates of $12.78 billion, while production, reported at 1,596 mboe/d, beat the analyst estimate of 1,591 mboe/d, but was down from last year’s production of 1,640 mboe/d.

Chevron performed better than its rivals in the most recent quarter results, after beating all analyst estimates, despite a decline in revenue from last year. ExxonMobil and ConocoPhillips on the other hand did miss a couple of estimates and registered declines in various performance measures as well.

Chevron also boasts one of the best margins per barrel, with a commanding $24 net income per barrel, as compared to that of closest rivalExxonMobil at $19.80. This indicates that the company’s cost of producing one barrel is far much lower than its competitors’.

Stability and growth

Chevron is one of the few companies that has been able to grow its dividend by double-digits over the last ten years. The company’s compounded dividend growth rate over the last ten years stands at 11%, as noted by CFO Patricia E. Yarrington during the most recent quarter earnings conference call.

This week Chevron’s Board of Directors declared a $1 per share quarterly common stock dividend payable in mid-June. This is an 11% increase and reflects the performance and strength of our current portfolio and [we] are confident in our compelling growth prospects. Since 2004, our dividend has grown at a compound annual rate of 11%, a growth rate that is well in excess of the S&P 500 and better than our peers.

The company is investing heavily on growth projects, and spent $8.2 billion during the quarter on upstream investments, while another $3.4 billion was spent in working capital with a majority of it being due to downstream operations. The company announced during the first quarter of 2013, the signing of a binding long-term sales and purchase agreement with Chubu Electric to deliver one million tons per year of natural gas from the Wheatstone Project. The Wheatstone natural gas project has over 80% of its production secured under long-term sales contracts.

The company also revealed that one of its downstream products, a new gas oil cracker achieved start-up, making the Yeosu refinery in South Korea the largest processor of heavy oil in that country. This indicates a first time success, which could guarantee more sales of the product in the future. The company is also advancing successfully in its exploration program after recent discoveries at Colorado, in the U.S.deep water Gulf of Mexico, and in Australia’s Carnarvon Basin where it announced discoveries at Kentish Knock South and the Elfin-1 prospect. The Elfin-1 prospect is its 21st discovery since 2009.

On the other hand, competitors ExxonMobil, ConocoPhillips and BP have committed to investing a combined total of $4 billion in Alaska’s Prudhoe oilfields. Alaska decided to give the oil industry a tax cut of $750 million in a bid to revive the declining mature oil fields developed in the 1970s. BP, which holds 26% of the Prudhoe Bay oilfield on Alaska’s northern coast, plans to increase its capital spending there by about 30% and add two onshore rigs to bring the total in the area to nine. The three companies will invest $1 billion in reviving the declining wells, while the remaining $3 billion will be used on projects aimed at raising production and drilling additional 110 wells.

The bottom line

Chevron’s gross margin is tied at 30% with that of ExxonMobil, and trumps BP at 11%. However, Chevron’s operating margin is superior to Exxon at 15% compared to 13%, while BP’s stands at 4%. Nonetheless, the BP seems to be the cheapest in terms of P/E, trading at 6.05, as compared to Chevron and ExxonMobil at 9.20 and 9.30 respectively. Chevron’s P/E is still below the industry average of 10.20. However, with a price to sales ratio of 1.07, Chevron has the highest compared to the rest, which trade at less than one times P/S. The industry average is 0.53 P/S.

All of these companies are looking into new oil fields for exploratory purposes. This calls for massive capital investment, but once a positive discovery is made, like in the case of Chevron. The company is exploring oil deposits across the world including Angola, where it expects to draw about 60,000 barrels a day, or about $1.4 million in net income, going by the $24 per barrel net income. If we extrapolate this to the discoveries in Australia and the deep waters in the Gulf of Mexico, the upside is enormous. This provides the opportunity for a stable continuous growth.


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