CHEVRON CORP. $110 (New York symbol CVX; Conservative Growth Portfolio, Resources sector; Shares outstanding: 2.0 billion; Market cap: $220.0 billion; Price-to-sales ratio: 0.9; Dividend yield: 3.3%; TSINetwork Rating: Above Average; www.chevron.com) is the second-largest integrated oil company in the U.S., after ExxonMobil Corp. (New York symbol XOM).
Chevron gets 90% of its earnings by producing oil (70% of production) and natural gas (30%). The remaining 10% comes from its refineries, petrochemical operations and its 17,800 gas stations, which operate under the Chevron, Texaco and Caltex banners.
At the end of 2011, the company’s reserves consisted of 8.5 billion barrels of oil equivalent (51% oil and 49% natural gas), plus an additional 2.7 billion barrels through joint ventures and affiliated businesses. The company produces about 1 billion barrels a year.
Chevron’s revenue rose 23.6%, from $220.9 billion in 2007 to $273.0 billion in 2008. The recession cut its revenue by 37.1%, to $171.6 billion, in 2009. However, revenue turned around and rose to $204.9 billion in 2010. It jumped 23.8%, to $253.7 billion, in 2011 due to higher oil prices and new projects in the U.S., Thailand, Nigeria and Brazil.
Earnings rose from $8.77 a share (or a total of $18.7 billion) in 2007 to $11.67 a share (or $23.9 billion) in 2008, but dropped to $5.24 a share (or $10.5 billion) in 2009. Earnings rebounded to $9.48 a share (or $19.0 billion) in 2010, and to $13.44 a share (or $26.9 billion) in 2011.
Cash flow per share increased from $13.11 in 2007 to $16.69 in 2008. It fell to $11.26 in 2009, but rose to $16.01 in 2010, and to $20.09 in 2011.
Chevron continues to do a good job of replacing its reserves. In 2012, it spent $32.7 billion on exploration and upgrades to its operations. This spending will rise by 12.2% in 2013, to $36.7 billion.
New projects have big potential
The company will put about 90% of this spending toward new oil and gas developments. The biggest is the Gorgon natural gas field off Australia’s northwest coast. In addition to developing the field, Chevron is building a liquefied natural gas (LNG) plant that will convert gas from Gorgon into a liquid state. The company will then ship the LNG on tankers to customers in Asia. Chevron owns 47.3% of Gorgon and will operate it when it begins producing in late 2014.
Labour shortages and weather delays have pushed up Gorgon’s cost to $52 billion (Chevron’s share is $24.6 billion), up from an earlier estimate of $37 billion. The stronger Australian dollar has also raised the overall cost in U.S. dollars. Even with the higher expenses, Gorgon’s long-term outlook is bright.
The company is also moving ahead with another Australian LNG project called Wheatstone. This operation should start up in early 2016.
Chevron recently sold 10% of Wheatstone to one of the project’s main customers, Tokyo Electric Power Co., for $4 billion. The sale cut Chevron’s stake to 64.1%, but it will help offset the project’s $29-billion cost (Chevron’s share is $18.6 billion).
Other big projects include its Jack (50% owned) and St. Malo (51% owned) offshore oil fields in the Gulf of Mexico. These projects will cost a total of $7.5 billion, but their reserves should last 30 years. Both fields should begin operating in 2014.
Chevron eyes Gulf for more growth
The company is also in a strong position to expand its operations in the Gulf of Mexico now that the U.S. government has resumed selling drilling permits. It stopped granting leases in 2010 following the explosion and sinking of the Deepwater Horizon drilling rig, which led to a major oil spill.
In addition, Chevron plans to invest $2.7 billion in its downstream operations in 2013. Some of this will go to repairing the damage caused by a fire at its oil refinery in Richmond, California. The company aims to complete these repairs in the first quarter of 2013.
Chevron’s strong balance sheet will support its growth. As of September 30, 2012, its long-term debt was $11.9 billion, or just 5% of its market cap. It also held cash of $21.6 billion, or $11.03 a share.
The company is still fighting a class-action lawsuit relating to rival oil company Texaco, which Chevron bought in 2001. The government of Ecuador recently won a $19-billion judgment that accused Texaco of failing to clean up oil wells that it drilled as part of a partnership with Ecuador’s state-owned oil company.
Chevron has few remaining assets in Ecuador, so the Ecuadorian government is trying to seize its assets in other countries, such as Canada, Argentina and Brazil. Even so, any settlement is years away and will probably be for much less than $19 billion.
Look for a rebound in 2013 Chevron’s per-share earnings will probably dip to $12.13 in 2012. The stock trades at 9.1 times that forecast. It also trades at a low 5.8 times the company’s likely cash flow of $18.95 a share. The $3.60 dividend yields 3.3%.
New projects could push up Chevron’s 2013 earnings to $14.90 a share, which would give it a p/e ratio of 7.4. The stock is also cheap at 4.9 times Chevron’s projected 2013 cash flow of $22.25 a share.
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