Chevron Corp. $99 – New York symbol CVX

CHEVRON CORP. $99 (New York symbol CVX; Conservative Growth Portfolio, Resources sector; Shares outstanding: 2.1 billion; Market cap: $207.9 billion; WSSF Rating: Above average) is the second-largest integrated oil company in the United States after ExxonMobil. Exploration and production supply just 25% of Chevron’s revenue, but nearly 80% of its profits. Asia accounts for about 40% of its production, followed by the U.S. (30%), Africa (15%) and other countries (15%). Chevron’s production is about 65% oil, and 35% natural gas. The company has proved reserves of 10.8 billion barrels of oil equivalent. The remaining 75% of Chevron’s revenue comes mainly from its 10 refineries, petrochemical plants and 25,100 retail gas stations, which operate under the Chevron, Texaco and Caltex brands. Thanks to rising oil prices and its 2005 acquisition of rival Unocal Corp., Chevron’s revenue rose from $121.8 billion in 2003 to $220.9 billion in 2007. Earnings grew from $3.48 a share (total $7.2 billion) in 2003 to $8.77 a share ($18.7 billion) in 2007. Cash flow per share rose from $5.90 in 2003 to $13.11 in 2007. Chevron’s daily production fell slightly in 2007, to 2.62 million barrels from 2.67 million barrels in 2006. Production will probably decline to around 2.5 million barrels a day this year. However, Chevron is working on over 40 new projects worth over $1 billion each that will increase its production and refining capacity. The company feels these investments will let it expand its oil and gas production by 3% a year over the next five years. Three of these projects will begin production in 2008. The Agbami offshore platform near Nigeria (Chevron owns 68%) should produce 250,000 barrels a day and last 20 years. As well, a recent upgrade will increase daily oil output at its 50%-owned Tengiz project in Kazakhstan to 540,000 barrels a day from 300,000. Chevron also owns 75% of the Blind Faith discovery in the Gulf of Mexico, which should initially produce 45,000 to 60,000 barrels a day. Offshore fields cost more to operate and develop than onshore discoveries. However, Chevron has a long history of success with offshore projects, and this expertise cuts its risk. Chevron is also developing new technologies. It spent $562 million on research in 2007. While that is less than 1% of its revenue, this spending is helping Chevron develop new underwater drilling equipment that will help it extract more oil. Chevron is also making progress with its 50%-owned Jack 2 deepwater discovery in the Gulf of Mexico, which could hold up to 15 billion barrels. This field is about five miles below the surface, and Chevron faces substantial upfront development costs. The company plans to drill a second exploratory well later this year. If Chevron decides to develop Jack 2, it will take several years before production begins. Another project with strong potential is a new liquefied natural gas (LNG) facility in Angola. This plant will cool regular natural gas to a liquid form. That makes it easier to transport by tanker to other countries. Chevron will own 36% of the Angolan LNG plant, which should begin operations in 2012. Chevron’s strong cash flow should let it continue to invest in these expensive projects. Capital spending will likely rise to $23 billion ($8.00 a share) in 2008, up 15% from $20 billion ($5.65 a share) in 2007. The company’s strong balance sheet also gives it plenty of flexibility to invest in new growth projects. At March 31, 2008, Chevron held cash of $8.7 billion ($4.20 a share), and long-term debt of $6.0 billion was just 3% of its market cap. Thanks mainly to the huge jump in oil and gas prices, Chevron has gained 55% since we first recommended it at $64 a share in our October, 2006 issue. However, we feel the company still has plenty of growth ahead. As well, its wide geographic presence limits the risk of operating in politically risky parts of Africa and South America. The stock now trades at just 8.5 times Chevron’s projected 2008 earnings of $11.63 a share, and at 6.9 times its cash flow of $14.45 a share. The $2.60 dividend yields 2.6%. Chevron is a buy.