We have maintained our Neutral recommendation on U.S. energy behemoth Chevron Corporation (CVX), as we see the stock performing in line with the broader market.
San Ramon, California-based 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 Corporation (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.
Chevron, in its present form, resulted from the 2001 merger between Texaco and Chevron Corporation. In August 2005, the company acquired Unocal for $18.4 billion. The company divides its operations into three main segments: Exploration and Production; Manufacturing, Products, and Transportation; and Other Businesses.
Chevron’s current oil and gas development project pipeline is among the best in the industry, targeting volume growth of 20% by 2017 – more than twice the rate of growth from 2003 to 2010 – driven by the big Australian gas projects (Gorgon and Wheatstone).
Additionally, Chevron possesses one of the healthiest balance sheets among its peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions. The company boasts of $21.3 billion in cash on hand and an investment-grade credit rating with a debt-to-capitalization ratio of just about 8.5%.
Management has established a track record of conservative capital management and cash returns to shareholders. It also pays a growing dividend, currently yielding an attractive 3.3%.
However, due to its integrated nature, Chevron is particularly susceptible to the downside risk from any weakness in the global economy. We are also concerned by the company’s high level of capital spending, which may result in reduced returns going forward.
Additionally, Chevron’s production growth profile depends on the timely development of upstream projects, almost all of which have inherent risk factors. Time and cost overruns on these programs may hamper the company’s revenues and earnings.
Considering these factors, we expect Chevron’s growth potential to be restrained with little room for meaningful upside from current levels. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).
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