Human Energy, Consistent Returns

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to pinpoint on a trailblazer in the global energy industry, Chevron Corporation (NYSE: CVX).  

The Business:

Warren Buffett once said, “Never invest in a business you can’t understand.” This not only allows the investor to purchase a company with conviction, however also allows them to spot trends blind to unfamiliar eyes. With this in mind, investors in any company should fully understand the business model of the company. Chevron is a trailblazer in the global energy industry. The company operates in its upstream and downstream segments, and possesses a global presence. Based on market capitalization, Chevron is valued at $226.95 billion. Because the company’s strong business model, Chevron possesses a profit margin of 11.96%.

Strengths:

  • Institutional Vote of Confidence: 61.31% of shares outstanding are held by institutional investors, displaying the confidence some of largest investors in the world have in the company and its future
  • Dividend: Currently, Chevron pays out quarterly dividends of $0.90, which annualized puts the dividend as yielding 3.13%, a major strength for long-term investors
  • Historic Revenue Growth: In 2003, Chevron reported revenue of $120.03 billion; in 2012, the company announced revenue of $241.90 billion, representing year over year annual growth of 8.10%, a trend which is expected to sustain into the future with projections placing 2016 revenue at $286.76 billion (this growth has been a result of aggressive investment by the company in new production facilities and strength in energy prices)
  • Steady Assets Growth: Since 2003, assets of the company have grown $33.81 billion, to the current $53.23 billion level, a major financial strength of the company
  • Basement Valuation: At the moment, Chevron possesses a price to earnings ratio of 8.64 and a price to sales ratio of 0.94; both of which represent a company trading with a basement valuation
  • Relatively Low Volatility: Presently, the company withholds a beta ratio of 0.77, representing a company trading with considerably less volatility than the overall market
  • Strong Cash Flow: In 2011, Chevron generated $39.80 billion in cash flow, representing the financial strength and security of the business
  • Diversified & Established Nature: The company employs 61,000, possesses a global presence, and is valued at a fifth of $1 trillion; the company’s diversified and established nature provides investors with a greater level of security and predictability
  • Net Cash Position: Chevron’s $14 billion of debt is outweighed by its $22 billion of cash and cash equivalents, resulting in a net cash position of $7.1 billion, or roughly $3.60 per share, a financial strength of the company
  • Margin Expansion: Over the past decade, the company’s profit margin has expanded from the 6% level to the current 11.96% figure, an extremely advantageous trend for the company

Weaknesses:

  • Expenditures Outgrowing Revenue: From 2007 to 2011, capital expenditures have grown 45.15%, while revenues have only grown 43.69%; expenditures outgrowing revenue will lead to margin compression if it persists

Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1912, Chevron has consistently raised their dividend payouts and is highly anticipated to continue to do so into the future
  • Upstream Segment: The company’s upstream segment, also known as exploration and production, has grown from generating $59.65 billion in 2007 to generating $93.18 billion in 2011, fueled by aggressive investment by the company in major capital projects; further growth in this segment is projected and will fuel overall company growth 
  • Strength in Energy Prices: Chevron’s downstream segment experiences improving margins when energy prices exhibit strength; any strength in energy prices could provide opportunity to the company
  • Major Capital Projects: The company’s exploration activities have added 10.5 billion barrels of risked oil-equivalent sources since 2002, and with several major capital projects planned for the upcoming years, each with an expected maximum net daily production of 25,000 barrels of oil-equivalent, the opportunity is presented to fuel growth
  • Results for R&D Spending: In 2013, Chevron is anticipated to pour $1.72 billion into research and development; any innovative technologies that results from this investment could lead to increased production and a greater exploration drilling success rate
  • Growing Energy Demand: Global energy demand is expected to increase 30% from 2010 to 2040, due to expanding prosperity and a rise in the global population to nearly 9 billion people; Chevron is presented the opportunity to meet growing demand and fuel revenue growth

Threats:

  • Faltering Energy Prices: Weakness in energy prices could squeeze the company’s margins and threaten business

Competitors:

Major publicly traded competitors of Chevron include Exxon Mobil Corporation (NYSE: XOM), BP PLC (NYSE: BP), Total SA (NYSE: TOT), and Eni SpA (NYSE: E). All of these companies operate in energy industry and compete directly with Chevron. Exxon Mobil is valued at $402.12 billion, pays out a dividend yielding 2.55%, and carries a price to earnings ratio of 9.21. BP is valued at $130.66 billion, pays out a dividend yielding 4.99%, and carries a price to earnings ratio of 11.31. Total is valued at $113.73 billion, pays out a dividend yielding 6.02%, and carries a price to earnings ratio of 8.04. Eni is valued at $75.96 billion, pays out a dividend yielding 5.74%, and carries a price to earnings ratio of 8.48.

The Foolish Bottom Line:  

Financially, Chevron could not be stronger. The company possesses a historic track record of consistent revenue growth, a growing dividend, and a net cash position. Looking forward, the company is likely to draw growth from the major capital projects it has planned and should benefit from growing energy demand which should strengthen energy prices. All in all, Chevron is a tremendous long-term investment and should hand investors returns that trounce the overall market.


makinmoney2424 has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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