At Chevron, Oil Lights The Way

10/15/2012


  Recent Price
$117
  Dividend
$3.60
  Yield
3.1%
  P/E Ratio
9
  Shares (millions)
1,968
  Long-Term Debt as % of Capital
7%
  52-Week Price Range
$118.53 - $92.29

Chevron's ($117; CVX) production of oil and natural gas in the first eight months of 2012 lagged year-earlier levels by more than 3%. In fact, production has been trending lower for a year and a half. Yet the stock has risen 26% since the end of 2010, leaving the S&P 500 Index (15%) and S&P 500 Energy Sector Index (9%) in the dust.

Why such robust gains? The secret lies in the oil. Some types of production are worth more than others.

Chevron is more highly leveraged to oil than its peers, providing grounds for optimism. The stock, yielding 3.1%, is a Buy and a Long-Term Buy.

Black gold

Despite a global explosion in natural-gas drilling, oil still accounts for 69% of Chevron's production, versus no more than 51% for its two largest rivals, Exxon Mobil ($92; XOM) and Royal Dutch Shell ($69; RDSa). Oil companies measure production in barrels of oil equivalent, converting natural gas and other fuels to barrels based on their energy content.

The oil-heavy production mix has benefited Chevron in recent quarters and should continue to support profits. While oil prices have declined over the last six months, the current price in both the U.S. ($92 per barrel) and Europe ($110 per barrel) is flat or up from year-earlier levels. Reuters' monthly oil poll projects a gradual rise in the U.S. price and decline in the European price, with both in the $100- to $104-per-barrel range in 2014.

Chevron blames its declining production on the aging of existing fields but says new projects should boost production 20% from 2012 through 2017, with most of the growth in the last four years. Chevron expects production to begin rising in the December quarter as maintenance projects end and drilling accelerates in the Gulf of Mexico.

Chevron isn't without risks. The company has run into trouble in South America, which accounts for less than 4% of its production but more than 10% of its undeveloped acreage. Chevron holds interests in massive fields off the shores of Brazil, and a September agreement to partner with Argentina's state-run oil company could make South America even more important in coming years — if the company can navigate choppy waters.

In Ecuador, a court has fined the company $19 billion over environmental issues dating back more than 20 years. On Oct. 9, the U.S. Supreme denied Chevron's bid to block the judgement. Chevron has also run into problems in Brazil, where courts seek about $20 billion in damages and have banned Chevron from operating in the country — all in connection with an oil spill that reportedly caused no ecological damage. We can't ignore these South American issues, but the stock's strength in recent weeks suggests the market isn't that worried.

Conclusion

Earlier this month, Chevron warned that September-quarter earnings would be "substantially lower" than June-quarter results, and the stock fell on the news. However, the consensus already projected a 14% decline. Near-term weakness aside, the market looks forward, and new production is coming. You can acquire an annual report for Chevron Corp. at 6001 Bollinger Canyon Road, San Ramon, CA 94583, (925) 842-1000, www.chevron.com.

CHEVRON
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '12
3.66
vs.
3.85
- 10%
108.79
-
95.73
8 - 7
Mar '12
3.27
vs.
3.09
+ 1%
112.28
-
105.08
8 - 8
Dec '11
2.58
vs.
2.64
+ 13%
110.01
-
86.68
8 - 6
Sep '11
3.92
vs.
1.87
+ 28%
109.75
-
87.30
10 - 8
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
236.29
13.44
3.09
110.01
-
86.68
8 - 6
2010
189.61
9.48
2.84
92.39
-
66.83
10 - 7
2009
159.29
5.24
2.66
79.82
-
56.12
15 - 11
2008
255.11
11.67
2.53
104.63
-
55.50
9 - 5
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
92
43
79
80
89
90
65

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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