CHEVRON CORP. $103 (New York symbol CVX; Conservative Growth Portfolio, Resources sector; Shares outstanding: 2.0 billion; Market cap: $206.0 billion; Price-to-sales ratio: 1.0; Dividend yield: 3.0%; 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 and natural gas. The remaining 10% comes from its refineries, petrochemical operations and its 14,000 gasoline stations, which operate under the Chevron, Texaco and Caltex banners.
In the past five years, Chevron has replaced about 95% of its reserves through exploration and acquisitions. At the end of 2010, it directly controlled 7.7 billion barrels of oil equivalent (including natural gas), plus an additional 2.8 billion barrels through joint ventures and affiliated businesses. The company produces about 1 billion barrels a year.
Thanks to rising oil production and prices, Chevron’s revenue rose 29.9%, from $210.1 billion in 2006 to $273.0 billion in 2008. The recession cut revenue by 37.1%, to $171.6 billion, in 2009. However, revenue jumped 19.4%, to $204.9 billion, in 2010.
Earnings rose from $7.80 a share (or a total of $17.1 billion) in 2006 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.
Cash flow per share rose from $10.09 in 2006 to $16.69 in 2008. It fell to $11.26 in 2009, but rose to $15.99 in 2010.
New projects have big potential
Chevron is building its reserves with several new projects. In 2010, it spent $21.8 billion on capital upgrades. It plans to raise this by 19.3%, to $26.0 billion, in 2011. It will spend about 85% of these funds on exploration and developing new discoveries.
Among these projects are its huge 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.
Another big project is its 47.3%-owned 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’s share of Gorgon’s $37-billion development cost is $17.5 billion. Gorgon should start producing in 2014, and last 40 years. Chevron has already signed contracts for 90% of its share of Gorgon’s LNG. That cuts the risk of this investment.
Big move into shale gas
The company is also expanding by acquisition. In February 2011 it bought Atlas Energy Inc., which produces oil and natural gas from over 7,900 wells in several midwestern states.
Atlas Energy is also a leading developer of shale-gas properties. It is focused on the huge Marcellus shale-gas field in Pennsylvania. Shale gas is natural gas that is trapped in rock formations. To extract it, companies must pump water and chemicals into the rock. This fractures the rock and releases the gas.
Chevron paid $3.4 billion in cash for Atlas Energy. It also paid $1.1 billion of Atlas’debt. The stock initially fell on the news. That’s because rising shale-gas production has increased natural-gas inventories and depressed prices in the past year. However, this purchase gives Chevron access to a field that could last for decades.
The company is also investing in its refining operations, which convert crude oil to gasoline and other petroleum products. For instance, Chevron recently announced that it will build a new, $1.4-billion lubricant-oil plant at its refinery in Mississippi. This new facility will be the world’s largest producer of motor oil when it begins operating in late 2013.
To help pay for these investments, Chevron is selling some of its overseas refining and retail businesses. For example, it recently agreed to sell a refinery and gas stations in the U.K. and Ireland for $1.7 billion. The sale should close in the second half of 2011.
Chevron’s strong balance sheet will support its growth plans. Its long-term debt of $9.8 billion is a low 5% of its market cap. The company also holds cash of $16.9 billion, or $8.39 a share.
24 years of dividend hikes
Thanks to its improving cash flow, Chevron raised its quarterly dividend by 8.3%, to $0.78 a share from $0.72 a share. The new annual rate of $3.12 yields 3.0%. The company has raised its dividend every year since 1988.
Chevron also aims to repurchase between $500 million and $1 billion of its shares each quarter.
The stock has gained 30% in the past year, and hit a new all-time high of $110 in April 2011. Even so, it trades at just 8.1 times Chevron’s 2011 forecast earnings of $12.78 a share, and at 5.7 times its likely cash flow of $18.20 a share.
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