Chevron Still Looks Like Black Gold


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$104.63 - $55.50

While November was a bad month for investors — the S&P 500 Index fell to its lowest point since April 1997 — it was a good month for Chevron ($72; CVX). The oil giant saw its stock rise 6% and collected its first oil from two production projects.

The Blind Faith field in the Gulf of Mexico began production on Nov. 11 and should reach 65,000 barrels of oil and 55 million cubic feet of natural gas per day by mid-February. On Nov. 14, the company began tapping a new field in its Indonesia holdings that should produce 34,000 barrels per day by 2012. Chevron, finally enjoying the fruits of its aggressive exploration spending, is a Buy and a Long-Term Buy.

Energy price declines hurt
Oil prices have plunged over the past seven months, leading to weaker earnings across the oil industry. In October and November, Chevron realized revenue of $53.29 per barrel on oil and other liquids sold, down from $102.73 in the September quarter. The company says December prices were “significantly lower” than those seen in the previous two months.

After a 71% decline in U.S. oil prices from July highs, a barrel of crude trades at a discount of about 12% to the 10-year average price of $47 per barrel. Consensus estimates project Chevron’s per-share earnings will decline 47% to $5.86 in 2009, with a high estimate of $8.40 and a low estimate of $4.45. The company was slated to release December-quarter earnings Jan. 30.

A production story
Though Chevron’s U.S. production has been hurt by hurricane-related declines, overseas daily production in October and November increased 7% from the September quarter as new fields came online. Chevron’s success in future years depends heavily on such new developments. With dozens of production projects in the works, including 40 that represent more than $1 billion of investment apiece, the company has one of the industry’s more robust production pipelines.

The Gorgon project in Australia has the potential to add 20 trillion cubic feet of natural gas to Chevron’s proved reserves — and eventually boost natural gas to 45% of production, up from the current 35%. Projects in Thailand, Brazil, Canada, and Vietnam should also boost production in 2009 and beyond. After weak showings in 2006 and 2007 and roughly flat production in 2008, a steady stream of projects should help Chevron return to its goal of 3% annual production growth.

Chevron spent about $23 billion on capital projects in 2008, up 15% from 2007 levels. With solid operating cash flows and more than $4.5 billion in net cash at the end of the September quarter, Chevron can keep funding both capital expenditures and dividend payments. Currently yielding 3.6%, Chevron has increased its payout at an annualized rate of 12% over the last five years.

Compelling value
The stock sells for 12 times a 2009 consensus profit estimate that has declined 41% over the last three months. Though weak oil prices are likely to constrain earnings in the short term, Chevron’s long-term production prospects leave it well-positioned to outperform its peers. An annual report is available at 6001 Bollinger Canyon Road, San Ramon, CA 94583; (925) 842-1000;

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