Chevron Bets Big On Pacific Rim Gas

11/7/2011


  Recent Price
$102
  Dividend
$3.12
  Yield
3.1%
  P/E Ratio
11
  Shares (millions)
1,999
  Long-Term Debt as % of Capital
8%
  52-Week Price Range
$110.01 - $80.41

A Latin adage suggests fortune favors the bold. Oil giant Chevron ($102; CVX) is testing the prescience of that proverb with a series of bold moves.

• After spending nearly $90 billion on capital projects over the last five calendar years and projecting a record $26 billion for this year, Chevron intends to spend even more in 2012. The projects needed to move the needle at Chevron take years to develop.

• In recent years, Chevron has de-emphasized its refining operations to focus on exploration and production. This shift should help profit margins, but it requires huge up-front investments, and profits depend heavily on oil and natural-gas prices.

• Chevron has focused its development efforts on the Pacific Rim, an area rich with natural-gas deposits and thirsty for energy. The region is also rife with challenges, such as labor shortages and competition from both rival companies and countries trying to tap their own resources rather than buy from Chevron.

Chevron, with its robust balance sheet and strong cash flow, can afford to plan ahead, and the risks the company takes should pay off in coming years. The stock, yielding 3.1%, is a Buy and a Long-Term Buy.

Growth story

In the September quarter, Chevron's per-share profits more than doubled to $3.92, well above Wall Street expectations, on 30% revenue growth. Upstream earnings nearly doubled on higher oil prices despite a 5% decline in production, while refining-and-marketing profits more than tripled on higher refining margins and the proceeds from asset sales.

The consensus projects per-share-profit growth of 28% in the December quarter but a 6% decline next year, mostly because of worries about lower energy prices. Chevron can't do much about prices, but it can take action to boost production.

Over the last five years, Chevron's total production has declined slightly. As past investments begin to bear fruit, Chevron says it expects total production to rise 1% to 2% a year over the next two or three years, then accelerate to at least 4% annual growth for at least three years as massive projects ramp up.

Chevron's biggest bets are Wheatstone and Gorgon, enormous liquid-natural-gas projects off the coast of Australia requiring a combined investment of more than $65 billion. Chevron has a 50% stake in Gorgon (expected to start producing in 2014) and a 73.6% stake in Wheatstone (2016). At peak estimated production, Chevron's piece of these pies could equate to more than 25 million metric tons of LNG per year, equal to nearly 20% of the company's current total production.

While Wheatstone and Gorgon grab the headlines, Chevron is also pursuing projects in Bangladesh, China, Liberia, Poland, and at least four wells in the Gulf of Mexico.

Conclusion

Chevron trades at 7.6 times trailing earnings, a 21% discount to its peer group and 20% below its three-year average. Last month, Chevron raised its quarterly dividend 8%. An annual report for Chevron Corp. is available 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
Sep '11
3.92
vs.
1.87
+ 30%
109.75
-
87.30
10 - 8
Jun '11
3.85
vs.
2.70
+ 32%
109.94
-
97.00
11 - 9
Mar '11
3.09
vs.
2.27
+ 26%
109.65
-
90.12
12 - 10
Dec '10
2.64
vs.
1.53
+ 9%
92.39
-
80.41
11 - 10
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
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
2007
203.97
8.77
2.26
95.50
-
64.99
11 - 7
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
88
86
76
77
29
81

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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