-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.
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.
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.
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.
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.
Chevron operates the three brands of Chevron, Texaco, and Caltex to drivers across the world.
Chevron operates and invests in pipelines around the world. Significant projects are located in North America, Asia, and Africa.
Chevron markets lubricants on six continents.
Headquarted in California, Chevron Shipping commissioned their first ship in 1895 and now ships crude oil, liquefied gas, and refined products to customers globally.
Chevron’s chemical products are incredibly diverse, with uses in food packaging, electronics, to medicine.
Chevron operates three coal mines and a Molybdenum mine in the US.
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.
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.
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 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.
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%.
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%.
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.
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.
|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.
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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