This Oil Stock Will Keep a Lamp Burning For Investors
Ankit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chevron (NYSE: CVX) is the third largest energy producer in US; the largest private producer of oil in Kazakhstan; the top oil and natural gas producer in Thailand; the largest oil producer in Indonesia; the top leaseholder in the US Gulf of Mexico. Chevron competes with other major petroleum producers include BP (NYSE: BP), Total (NYSE: TOT), ConocoPhillips (NYSE: COP), and ExxonMobil (NYSE: XOM). The following table summarizes the expected annual growth for next 5 years, dividend yield, and forward PE of these five major oil producers:
|
Company |
Expected Annual Growth for next 5 Years |
Dividend Yield |
Forward PE |
|
BP |
3.3% |
4.38% |
8.5 |
|
Chevron |
1.63% |
3.07% |
9.4 |
|
Total |
7.1% |
5.54% |
7.45 |
|
ConocoPhillips |
-2% |
4.54% |
10.23 |
|
Exxon Mobil |
7.47% |
2.47% |
11.31 |
The company is trading at forward P/E of 9.4 vs. US peers group average of ~10.5. I think investors are being more than adequately compensated for the execution and capital spending inflation risks. I believe Chevron’s medium-term growth prospects are the best amongst the global integrated oil companies, and I expect the stock to be a strong performer as it enters its mid-single digit production growth stage in the 2014-2020 timeframe due to the following reasons.
Visibility over Gorgon Project
The company is responsible for 47% of the Gorgon LNG project which is now over 45% complete. Chevron has been able to upgrade nameplate capacity of each LNG train by 4% to 5.2 million tons per annum through design optimizations, for a total capacity of 15.6 MTPA. Oil prices have moved up 60% since Gorgon was approved, which I believe will further help in improving project economics. Also, Chevron continues to achieve exploration success on the upstream side, which should help drive further expansions at Gorgon.
Introduction of Cracking Facility in Texas
Downstream refining and cracking operations benefited from margin improvement. Chevron continues to divest refining operations and has decided to convert its Kurnell refinery in Australia into an import terminal in 2014. I believe the company’s focus on restructuring its refining portfolio will drive upside to the earnings. Also, I believe the company will benefit from cheap US gas prices as the company is planning setting up of ethylene/polyethylene cracking facilities in Texas.
Potential Share Buybacks
Although Chevron has ample financial flexibility to fund a large buyback program, I expect Chevron to prefer to keep cash levels elevated given the high capital commitments involved with Gorgon and Wheatstone LNG projects and the recent elevated volatility in the commodity markets. I believe that management will increase its buyback program in coming quarters as headwinds over commodity prices alleviate.
In my view, Chevron story is dominated by three long-dated projects which are set to deliver substantial highly profitable growth when all on-stream in 2017. Meanwhile, it remains the best oil leveraged major, well designed for elevated oil prices, which I believe will be the case in the long term. It has a smaller than average refining footprint and low US gas production, hence its leading metrics on earnings and cash flow per barrel of production. Thus, I recommend it a solid buy for long term.
ankitagrawal has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron and Total SA. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
