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Chevron Can Still Energize Your Portfolio

Richard Saintvilus

NEW YORK (TheStreet) -- Since reaching a recent high of $126.43 in September, shares of Chevron have hit a snag, falling more than 6%. Coincidently, this drop matches the company's 6% profit decline, which was caused by weak refining results.

Investors are now wondering if Chevron best days are over. I don't believe that to be the case.

As with rival Exxon Mobil , production growth has been Chevron's toughest obstacle. As the world's second-largest oil company, investors have demanded immediate results, and Chevron management has done its best to oblige. But it's not going to happen overnight. Not to mention, growth does not come free.

To that end, the 6% decline in profits, which coincided with higher expenses wasn't a surprise. In fact, on a relative basis, I consider it a strong performance. While the 6% decline might seem disappointing, let's realize not only did Exxon's profits declined 18% this quarter, which didn't stop Warren Buffett from taking a $3.4 billion stake in the company. Rivals such as BP and Total posted declines of 26% and 20%, respectively.

So, before we blow Chevron's results completely out of proportion, given that the company posted a 3% year-over-year increase in oil and gas production, along with (what remains) a highly profitable upstream business, I believe the company still offers plenty of value at current levels. This is despite the struggles in the refining business.

With Exxon posting third-quarter production of growth of only 1.5%, which (if I may say) was good for Exxon, I was quite pleased with Chevron's output of 3%. The Street saw it differently. Investors have every right to demand more, especially since management missed its own production guidance. But it's not that cut-and-dry.

Let's not forget, in the August quarter, not only did Chevron's revenue decline 8% year over year, but production declined 2% year over year and sequentially. By contrast, in this quarter revenue grew almost 2% compared to a 2.4% revenue decline for Exxon. Chevron's net oil-equivalent production rose 2.7% from 2.52 million barrels per day to 2.59 million.

Here again, while investors are frustrated, the Street must realize this was Chevron's fastest rate of production growth in the past 12 quarters. On a segmental basis, Chevron's upstream business, which posted earnings of $5 billion, continues to do most of the heavy lifting. This has been the ongoing trend as Chevron achieves around 80% of its upstream earnings in international markets. This has helped offset weak oil prices here in U.S.

Surprisingly, the U.S., which saw better-than-expected prices in oil and gas, contributed a meaningful portion of Chevron's third-quarter revenue. The story, though, continues to be the 45% decline in refining profits and the rise in operating expenses, which ate into Chevron's oil and gas exploration profits.

But in this sector, growth and profitability is virtually impossible without ongoing capital investments. Management understands this. This is why the company has plans to build liquefied natural gas export facilities in areas like Australia. Not to mention, there's also a project to build new deep water production platforms in the Gulf of Mexico. The company expects to spend close to $40 billion this year on these and other projects.

But here's the thing: Given Chevron's rich pipeline of growth projects, which -- I believe -- should maintain higher production levels across the next five years, I have absolutely no reason to buy into the near-term refining fears. It's true that capital expenditures will come in above management's prior guidance. But the way I see it, the surprise would have been if the company didn't spend at all.

As I've said, growth is not cheap. Investors can't have it both ways.

It was not a blowout quarter. But it was far from a disaster. Management only needed to show that Chevron's production growth was still progressing. I believe it did that and more.

In that regard, given Chevron's commitment to growth, I would be a buyer here at current levels and expect shares will reach $130 in the next six to 12 months. The stock won't post exciting gains, but 3.40% dividend yield certainly makes up for it.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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