Five Factors Pulling Down Chevron

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The third quarter financial reports of Chevron Corporation (NYSE: CVX) weren’t positive as the company’s revenues tumbled down, and the operating profitability declined. Looking up ahead the company’s revenues might continue to fall unless Chevron will decide to make a significant change (e.g. acquire an oil company). Let’s examine several factors that could keep the company’s stock from rising, and analyze the company’s potential progress in the near future.

There are several reasons that could adversely affect Chevron’s stock in the weeks to follow:

  1. Oil Prices are falling: despite the recent rally in oil prices, they are still well below their level from the same time last year, and I suspect might further fall in the weeks to follow (see below for more). This could pull down the revenues of Chevron;
  2. Natural Gas might decline: The prices of natural gas also rose in recent weeks as the weather in the U.S is getting colder. Nonetheless, if this winter will be warmer than normal this could curb the rally of natural gas's price, which, in turn, could also pull down the revenues of the company;
  3. Bush Tax Cuts could expire by the end of 2012: The Bush tax cuts have included a low 15% tax on dividends. Once the tax cuts will expire on December 31, the tax on dividends will rise to a rate as high as 43%. Since Chevron is considered a low growth stock with a high dividend, this could result in U.S investors dumping the stock to avoid paying higher taxes in 2013 on divided. It’s still unclear what will be of the Bush Tax Cuts as Congress hasn’t reached a decision regarding the multi-year deficit reduction plan;
  4. The company’s revenues continue to contract (see below): this could suggest the company is struggling to reach growth. If this trend will continue, it could further lower the attractiveness of the company as an investment.
  5. Unfavorable Changes in Foreign Exchange: The shifts in foreign exchange were among the factors that pulled down the company’s revenues. This factor is a big uncertainty and is likely to continue affecting the company’s revenues. If this trend will continue, it could further adversely affect the company’s revenues. 

Let’s turn now to the company’s recent financial reports and its progress with respect to related markets such as oil and natural gas.

Chevron’s Micro View

The company’s third quarter financial reports didn’t show much progress: the company’s revenues decline by 9.9% compared to the same quarter in 2011 and by 7.3% compared to the previous quarter. The company’s operating profit also fell by 25.5% compared to the third quarter of 2011. This downward trend might continue if the price of oil will continue to decline (see below for more). Moreover, due to the recent drop in sales and operating profits the company’s profitability also declined from 21% in the third quarter of 2011 to 17% in the third quarter of 2012. Three factors could have affected the decline in the company’s revenues: the decline in oil and gas prices, the unfavorable currency shifts and the drop in oil and gas production. In regards to the latter, the company’s production has also declined during the quarter. If this trend will continue, it could also contribute to the company’s lack of growth.  

Let's move now to see how Chevron performed with respect to the market, energy prices and its peers.

Oil and Chevron

The recent fall in the price of oil and by extension United States Oil may have curbed Chevron’s recent rise. During November/December, the linear correlation between oil price and Chevron reached 0.48. Therefore, if the price of oil further dwindle it is likely to affect the company’s valuation (assuming you use DCF) and by extension the company’s stock price. Since the beginning of the year oil prices declined by 16.5%; United States Oil, by 20.6%. 

NG and Chevron

The prices of natural gas and United States Natural Gas have declined in recent weeks, but throughout the year, the prices have increased by nearly 19%. If the price of natural gas will continue to fall in the weeks to follow, this could also curb the rally of Chevron; the linear correlation between Chevron and natural gas price during the past couple of months was weak and positive. 

The chart below shows the changes in the operating profitability of Chevron and the developments in the prices of natural gas and oil (average quarterly prices, normalized to the third quarter in 2011).

The chart shows the recent fall in the quarterly price of oil and the rally of natural gas prices during the last quarter of the year. Since the price of oil is likely to have a stronger effect on the company’s profitability than the price of natural gas, this chart suggests the profitability of the company could further fall in the last quarter of the year.   

Chevron and Other Oil Companies – Dividends

In regards to dividend payments as I have stated above, Chevron’s stock might pull back if the Bush tax cuts will expire. But Chevron isn’t the only oil company that pays dividend. In fact, Chevron is only in the middle of the pack in regards to dividend yields: ExxonMobil Corporation (NYSE: XOM) is paying a quarterly dividend of  $0.57 per share, which comes to an annual yield of 2.55%; Chevron is paying $0.9 per quarter, which is an annual yield of 3.33%; Royal Dutch Shell (NYSE: RDS-A) is paying a dividend of $0.86 per share, which is a much higher yield of 5.06%; BP plc  is paying $0.54 per share, which is an annual yield of 5.23%. This means, if the Bush cuts will expire, all these companies stocks might suffer as many U.S investors might consider pulling back from these investments to avoid a tax hike.

The chart below shows the normalized prices of Chevron, S&P500 and Exxon during 2012 (prices are normalized to January 3rd, 2012). As seen in the chart below, Chevron and Exxon have both under-performed the market during the year.

 

What is the bottom line? Chevron isn’t doing well and could continue to fall in the weeks to follow. Unless the company will expand its operations (perhaps another merger or acquisition of oil and gas related companies), this downward trend is likely to continue. 

For further Reading

Will Oil Continue Its Tumble?

Is Exxon Due for a Rally?



liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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