Chevron: Core Holding in the Integrated Space
On Apr 2, 2014, we issued an updated research report on San Ramon, CA-based energy giant Chevron Corp. (CVX). We continue to view the company as a core holding in the large-cap integrated space based on its relatively low-risk conglomerate business structure, fortress-like balance sheet, ample free cash flows even in a low oil price environment and growing dividends.
Chevron is one of the six super major oil and gas companies in the world and the second-largest energy firm in the U.S. behind Exxon Mobil Corp. (XOM). As a vertically-integrated oil entity, it is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses.
Driven by the big Australian liquefied natural gas (LNG) projects (Gorgon and Wheatstone), as well as deepwater developments in the U.S. Gulf of Mexico, Chevron is targeting volume growth of 25% by 2017.
The company’s financial flexibility and strong balance sheet are real assets in this highly-uncertain period for the economy. Chevron remains in excellent financial health, with more than $16 billion in cash on hand and an investment-grade credit rating with a debt-to-capitalization ratio of just over 12%.
Management has established quite a track record of conservative capital management and cash returns to shareholders. It also pays a growing dividend, currently yielding an attractive 3.4%.
Chevron has targeted quarterly buybacks of up to $1 billion of its common stock since late 2010. We believe that the repurchase program not only highlights the company’s commitment to create value for shareholders but also underlines Chevron’s confidence in commodity prices.
However, as is the case with other companies engaged in the business of exploration and production, Chevron’s results are directly exposed to oil and gas prices, which are inherently volatile and subject to complex market forces. Realized prices could differ significantly from our estimates, thereby affecting the company’s revenues, earnings and cash flows.
Chevron has pegged its 2014 capital budget at a massive $39.8 billion. This is expected to substantially increase Chevron’s leverage and deteriorate its credit metrics. Additionally, the increasing capital intensity of its operations may result in reduced returns going forward.
Chevron currently carries a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
While we expect Chevron to perform in line with its peers and industry levels in the coming months and advice investors to wait for a better entry point before accumulating shares, one can look at Range Resources Corp. (RRC) and Abraxas Petroleum Corp. (AXAS) as good buying opportunities. While Range Resources holds a Zacks Rank #1 (Strong Buy), Abraxas Petroleum carries a Zacks Rank #2 (Buy).
Read the Full Research Report on CVX
Read the Full Research Report on RRC
Read the Full Research Report on XOM
Read the Full Research Report on AXAS
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