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Chevron Corporation (CVX) Dividend Stock Analysis

Summary

-Chevron (CVX) is a leading energy company involved in crude oil, natural gas, and other energy production.
-Revenue growth has averaged approximately 2% over the past five years.
-Earnings have experienced negative growth over this same period due to low oil prices in 2009.
-Revenue and Earnings for the first half of 2010 have shown a substantial improvement over 2009.
-The dividend yield is 3.5% with low payout ratio and an average of 10% dividend growth.
-With a P/E of less than 10 and a superb balance sheet, I find Chevron stock to be attractively valued.

Overview

Founded in 1879, Chevron (NYSE: CVX) is currently one of the largest oil and gas companies in the world.

In 2009, Chevron reported a net production of 1.846 million barrels of crude oil and natural gas liquids, 4.989 billion cubic feet of natural gas, and 26 thousand barrels of oil sands per day.

Businesses

Chevron is divided into a number of different businesses. Some of them are directly profitable while others are supplementary to meeting Chevron’s needs.

As a breakdown for total 2009 earnings of $10.483 billion, $10.431 billion came from upstream projects (exploration, production), $565 million came from downstream projects (refining, marketing, transportation), $409 million came from chemicals, and ($922 million) was attributable to all other sources. Even among supermajor oil companies, Chevron is particularly focused on upstream projects and therefore is most directly linked to the price of these resources.

Oil Exploration

Chevron extracts oil from locations around the world, including from deepwater wells in the Gulf of Mexico and off of other coasts such as Brazil, from offshore wells in Europe and other locations, and on land from California, Africa, Kazakhstan, and other places, and oil sands operations in Canada.

Natural Gas Exploration

Chevron’s natural gas portfolio stretches across six continents. Chevron has the ability to transport natural gas from production locations to user locations by means of pipelines, liquefied natural gas (LNG), and gas-to-liquid (GTL) technology.

Refining

Chevron has the capability to turn its basic produced resources into finished materials ready for use. Seven refineries make up three-quarters of Chevron’s total fuel refining capability.

Supply and Trading

Chevron’s requirements to get materials from upstream projects to downstream projects is huge. Chevron has to develop and maintain logistics and partners to get products to where they need to be safely and for a low cost. For instance, Chevron markets aviation fuel at more than 875 airports and is the leading marketer of jet fuels in the US.

Marketing

Chevron operates the three brands of Chevron, Texaco, and Caltex to drivers across the world.

Pipelines

Chevron operates and invests in pipelines around the world. Significant projects are located in North America, Asia, and Africa.

Lubricants

Chevron markets lubricants on six continents.

Shipping

Headquarted in California, Chevron Shipping commissioned their first ship in 1895 and now ships crude oil, liquefied gas, and refined products to customers globally.

Chemicals

Chevron’s chemical products are incredibly diverse, with uses in food packaging, electronics, to medicine.

Mining

Chevron operates three coal mines and a Molybdenum mine in the US.

Power

Chevron’s power operating capacity is 3,100 megawatts. Much of the power is derived from natural gas, while some is from wind. Chevron is the largest producer of geothermal energy in the world.

Technology

Chevron invests in emerging energy opportunities including solar projects, hydrogen projects, and bio-fuels products.

Revenue and Earnings

Chevron’s growth was strong until 2009 when the effects from the global recession took a significant chunk out of the revenues and profits of all big oil companies.

Revenue Growth

Year Revenue
2009 $171.6 billion
2008 $273.0 billion
2007 $220.9 billion
2006 $210.1 billion
2005 $198.2 billion
2004 $155.3 billion

The revenue listed here includes total sales of Chevron as well as income from equity affiliates and other income. Revenue growth over this five-year period has averaged 2% annually. The reported revenue of $101.1 billion for the first two quarters of 2010 has been a substantial recovery over the reported revenue of $76.3 billion for the first two quarters of 2009.

Earnings Growth

Year Earnings
2009 $10.483 billion
2008 $23.931 billion
2007 $18.688 billion
2006 $17.138 billion
2005 $14.099 billion
2004 $13.034 billion

Earnings growth over this five-year time period has been negative. 2010 numbers, however, show a vast improvement over 2009. EPS for 2010 is expected to approximately double the EPS of 2009, and Chevron reported that company-wide earnings for the first half of 2010 were approximately $10 billion, which is a great improvement over the $3.5 billion reported for the first half of 2009.

Dividends

Chevron has increased its dividend for 23 consecutive years, and currently offers a 3.45% dividend yield with a payout ratio of only about 30%.

Dividend Growth

Year Dividend Yield
2010 $2.84 3.50%
2009 $2.66 3.80%
2008 $2.53 3.20%
2007 $2.26 2.70%
2006 $2.01 3.00%
2005 $1.75 2.90%

Chevron has grown its dividend by an average of 10% annually over this five-year time period. Dividend growth has continued straight through the drop in oil prices, although the most recent quarterly increase was less than 6%.

Balance Sheet

Chevron has the strongest balance sheet among its peers with a total debt/equity ratio of only 0.11. Big Oil companies in general tend to have strong balance sheets, and Chevron’s is the cleanest among them.

Investment Thesis

Economic uncertainty, regulatory uncertainty, continued talk of alternative energy, and fallout from the BP Gulf disaster seem to have kept valuations for big oil stocks low. Chevron has a diversified set of projects in the exploration, production, refining, and transportation of a variety of energy sources including crude oil, natural gas, and some renewables.

Chevron has the strongest balance sheet in an industry primarily composed of strong balance sheets. The total debt/equity ratio is slightly better than XOM and significantly better than TOT, COP, and to some extent, RDS. Meanwhile, its valuation is fairly low in an industry full of fairly low valuations. It trades for a mild discount to XOM and RDS.

Chevron, like many of the above supermajors, has been continually growing its base of assets in spite of a problematic economy and low energy prices. The following chart shows the approximate growth in assets, liabilities, and consequently, equity.

Expansion

Year Total Assets Total Liabilities Shareholder Equity
2010 $171.7 billion $72.1 billion $99.6 billion
2009 $164.6 billion $72.7 billion $91.9 billion
2008 $161.1 billion $74.5 billion $86.6 billion
2007 $148.8 billion $71.7 billion $77.1 billion
2006 $132.6 billion $63.7 billion $68.9 billion
2005 $125.8 billion $63.1 billion $62.7 billion

Shareholder Equity has grown by an average of 10% annually over this five-year period.

Liquid Natural Gas (LNG) plays a big role in Chevron’s business. Natural gas uses up a lot of volume per unit of energy, and this is acceptable for pipelines, but to transport it to places without pipeline access is not cost effective. Chevron and other companies can now compress it into liquid form, ship it anywhere they want via specialized insulated ships, and then return it to its gas form on arrival.

Energy companies like Chevron face a changing world. Their proven energy reserves are huge, but finite, and increasing environmental concerns and backlash, along with increasingly cost-efficient alternative energy solutions are significant trends to be aware of.

Chevron Energy Solutions is a unit of Chevron that focuses on providing renewable power sources and maximizing energy efficiency for its clients. The size of their projects range from $1 million to over $100 million, and they are the largest installer of solar panels for educational facilities in the US as well as one of the largest developers of solar photovoltaic projects in California. The company claims over 22 megawatts of installation totaling 128,000 solar panels, and deals with biomass fuel as well.

Although Chevron Energy Solutions is respectable and large, and their projects are valuable, it’s a drop in the ocean that is Chevron. All of these big oil companies want to look green when everyone knows they are not. But, these companies are aware of changing trends and the usefulness of a variety of energy sources. Big Oil companies are not just oil companies, but also some of the largest and most profitable corporations on the planet that employ an incredible number of scientists and engineers. The combination of enormous amounts of capital with technical prowess provides Chevron and similar companies the chance to grasp opportunities when presented with them.

Risks

Every company has risks, and big oil companies certainly have their fair share of them. Chevron faces uncertainty in terms of currencies, geopolitics, litigation, and regulation. Litigation is an ever-present risk due to the large scale that a company like Chevron operates at and the drastic effect they have, some for better and some for worse, on communities around the world. I’ve personally known people from several countries that have described first hand the kind of damage the world’s insatiable desire for energy has caused their communities.

The primary risk is that of changing oil prices, which are outside of Chevron’s control and have the largest impact on their profitability. In addition, with rapid increases in the development and deployment of alternative energy sources as time unfolds, Chevron will have to continually invest in the most profitable energy production to remain competitive, and stay nimble despite its gargantuan size. This year, BP reminded investors of yet another risk that is always present in this type of company: catastrophic failures.

Conclusion and Valuation

In conclusion, I find Chevron stock to be attractively valued at its current price. With a P/E of under 10, a P/B of 1.64, an above-average dividend yield, significant dividend growth, a low payout ratio, and a superb balance sheet, Chevron may be poised to offer dividend investors a significant opportunity. This large and diverse energy company provides the world with crucial products and services, and yet economic/regulatory uncertainty and shifting energy trends are keeping the price quite low.

Full Disclosure: I do not have any position in CVX at the time of this writing, but I plan to start a position this week.
You can see my full list of individual holdings here.

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Comments

  1. Good post! I see good risk/reward in oilsector.

    Some of the risks:
    *Dependent on one sector) A lot of oildemand comes from transport, about 70%. So new inventions in engines could really decrease the demand and also the assetvalue of oilrigs.
    *Regulation) I see this as a lesser threat since many oilcompanies have drilling around the globe. Could hurt some companies based mainly in one country, like norweigan Statoil.

    Some of the positive sides:
    * If there are no significant new inventions or drastic change of oir lifestiles oil demand should increase fast. Thriving economies such as China and India are quickly becoming large oil consumers.China has seen oil consumption grow by 8% yearly since 2002.
    * Todays society is dependant on oil to function which is not the case for coalproducers which are valued in line with oilcompanies.
    * The valuations are very attractive and the finances are superstrong.
    *Despite the volatile oilprice many oilcompanies had OK profits in 2009. On todays valuations many oilcompanies are quite priceworth even on 2009 profit. Plus we have seen great profitincreases in this year.

    I think oilcompanies make a good contribtion to a longterm portfolio at todays valuations. There are positive as well as negative scenarios for the future and I think the market might be putting to much emphasis on the negative ones.

  2. I find it hard to separate between the oilcompanies. Perhaps because its hard to get a real grip of their diverse operations.

    In my view they have similar operations, similar growth, similar valuations and similar finances. The biggest difference I see is 2009 earnings were a company like Total “only” decreased earnings with about 20% while Exxon decreased more then 50%. Im not sure this is any good measure?

  3. I totally agree the Chevron is a good buy. All oil companies got hammered with the whole BP thing, and they most look to have attractive valuations. If investing for the long term (as in Buffett long term), oil prices can only go up as the resource becomes scarcer and more expensive to extract.

  4. Defensiven,
    Thanks for the lengthy comment.

    Oil companies have more similarities than differences, but there are some differences. Some of them are more diverse than others (upstream/downstreams, oil/gas, etc.) while others are more focused. Chevron, for example, is highly focused on upstream compared to other supermajors. There are also differences in balance sheet. COP and TOT have lower valuations and not-quite-as-good balance sheets.

    And of course there are big dividend yield differences. Plus there is the more subjective assessment of management quality.

    College Investor,
    Good comment. When I review a company like this, I’m looking very far into the long-term. I have no idea what oil prices are going to do in the short, medium, or even moderately long terms.

  5. Good point, I will try to look more for operational differences. I suppose different kind of operations explains much of the earnings difference in 2009.

  6. Great post. After reading “Chevron is the largest producer of geothermal energy in the world. ” It made me very interested in the company.

    I know little about the oil business but would be very interested in having my finger in this pie.

    Thanks for the post!

  7. Thanks for the analysis. From my (UK) point of view, it looks like Chevron might be a good place to start on the NYSE. I’m thinking it over. Hope their safety culture is better than BP. -SG

  8. Salis,

    Good point about the safety. That’s always a risk. One option is to diversify into a few oil companies. XOM is my second choice for oil after CVX.

    Dd,

    It’s definitely worth looking into. It’s important to realize that despite all of their green stuff, they’re still really an oil/gas company. All the oil companies want to look green, especially Chevron. They’ve recently released a new marketing campaign called “We Agree”, where they are saying oil companies should be more focused on the environment, and they highly all of their renewable and green technology. So it’s great that Chevron’s doing all that but it’s important to realize as an investor that, above all, Chevron is very much a fossil fuel company.

  9. Thanks for the great analysis.

    I love oil and gas companies going forward. Currently, I feel the entire industry is undervalued. On the American side, I own shares of Transocean (not a dividend payer, but with a share price of 45 when I entered, how could I resist?).

    This is just my opinion but it seems like there’s been a flood of money into the precious metals. The big gold producers seem to have some pretty crazy valuations right now as peoples’ psyches are still hurting from the economic downturn. I think a large part of oil companies being undervalued are investors just throwing money into gold to try to be “defensive”. In the long run, the economy and crude prices will recover. In the meantime, I am happy being a little contrarian and looking to continue to add oil and gas companies to my portfolio.

    Happy investing,

    DH

  10. giveitatry says:

    A major downside with large oil company is the possibility of major accident as seen in case of BP. This is really a black swan type of thing but it could half the stock price without any recourse.

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  9. [...] Chevron is one of the largest oil majors, has one of the strongest balance sheets among them, and is trading at a discount. The company is vulnerable to changes in oil prices, but for decades the company has grown its dividend, grown its EPS, grown its book value, grown its sales, and so forth, even as it experiences setbacks from time to time. Chevron has also shown a willingness to devote resources to alternative energy. The vast majority of their assets are involved with fossil fuels, but compared to other oil majors, Chevron has shown a willingness to face change, and so their ability to survive for decades in the face of changing energy conditions is solid. Chevron isn’t nearly as cheap as it was several months ago, but continuing to dollar-cost-average into the company at current prices should yield reasonable results. Full CVX Analysis [...]

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