The Foolish Case for Chevron

By Dr. Osman Gulseven - October 31, 2012 | Tickers: BP, CVX, COP, XOM | 0 Comments

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Chevron (NYSE: CVX) is the second-largest U.S. oil producer by market capitalization, and conducts its operations in both upstream and downstream oil and gas businesses. Upstream operations involve crude oil and natural gas exploration and production, processing, liquefaction, transportation, and the regasification of oil and liquefied natural gas. Downstream operations consist of refining and marketing oil and its accompanying lubricants via pipelines, rail, and road. The company is ranked twelfth on the Forbes Global 2000, and is the fifth-most-profitable company in the world.

Recent Oil Spills

In Brazil, due to a miscalculation during the drilling of its Frade field last November, the equivalent of around 4,000 barrels of oil leaked into the Atlantic. Chevron settled with the Brazilian National Petroleum Agency by making an upfront payment of $14 million.  The original fine was $17.3 million, but Chevron got a 30% reduction because of the upfront payment.

Even though there was no environmental damage or deterioration, media coverage made the event look as bad as British Petroleum’s oil spill in the Gulf of Mexico. BP’s spill-related settlement could cost as high as $38 billion, so Chevron’s experience is nowhere near as painful as British Petroleum's.

Recent Moves

Chevron has an ace up its sleeve: The company has a massively positive cash flow situation, with $21.5 billion in cash available for the company to invest in expansion. But the news doing the rounds suggests that Chevron may be out to buy a company, since holding cash is not profitable in today’s financial environment. Its total debt is just $10.2 billion, which leaves it way ahead of the competition. 

Disappointment in Brazil aside, in Ecuador Chevron has been unable to dodge a pending pollution lawsuit through which a provincial court won a landmark verdict against the oil company. The company has failed to ask the Supreme Court to intervene against the imposed damages. So far, the assessed damages for Chevron have amounted to $19 billion, making it the largest judgement of its kind in history. The company’s South American presence continues to grow as it explores Argentina’s promising shale formations.

In Australia, Chevron is making progress as it sets aside funds for expansion of its $45 billion Gorgon project for 2014. The company is also the largest shareholder in Gorgon, with a 47% interest in the project. In China, the company has expanded gas exploration, and has petroleum exploration, production, and marketing all in sharp focus. Chevron has allocated roughly $28.5 billion for exploration and production in the Gulf of Mexico, Brazil, and Africa.

Chevron vs. The Rest

Now there is always this dilemma: which oil giant is the best investment? I think it depends on what exactly you expect from each stock. Exxon Mobil (NYSE: XOM) is the absolute market leader. Even if the combined  market caps of Chevron and ConocoPhilips (NYSE: COP), is substantially less than Exxon Mobil's market cap of $418 billion. For income-oriented investors, ConocoPhilips and Chevron are possibly better fits. Their yields of 4.61% and 3.24% are substantially higher than Exxon Mobil's yield of 2.52%. On the other hand, Exxon Mobil continuously tries to create a better shareholder value through stock purchases. So, if you are a fan of stock purchases over dividends then Exxon Mobil could be the right stock for your portfolio. 

Foolish Summary

Chevron’s EPS for Q2 2012 stood at $3.56 per share, and the company had revenues of $62.61 billion, a 3.13% improvement over 2011 second-quarter results. Despite the legal trouble Chevron has faced over the past two years, the company is continuing to expand its operations and make smart plays in new markets. Undoubtedly, Chevron is a buy option because of its knack for producing results.

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