Chevron's Dividend Raise Bodes Well for the Future

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

Let's examine one of the world's biggest oil producers in a SWOT analysis of Chevron (NYSE: CVX) to gain a better understanding of the company. 

Strengths

  • Recently raised its dividend for a 25th consecutive year. The yield currently stands at a healthy 3.6%, which is far far far superior to the 10-year T-Bill.
  • Reported fourth-quarter earnings that rose 41% to over $7 billion (a new quarterly record for the company).
  • According to this column and quoting: “Chevron is the producer of the Delo brand of engine lubricants, coolants and oils. These products are technologically superior to anything else on the market today and will give Chevron clear market dominance in the future.” 
  • As the BRIC nations (Brazil, Russia, India, and China advance technologically) the demand for oil will grow substantially, raising worldwide demand, the price of oil, and thus margins.
  • Oil and gas production offers a HUGE economic moat due to the high costs of entry, government regulations, etc.
  • has the second highest reserves of oil of any public corporation, second only to ExxonMobil (NYSE: XOM) For the record, Exxon's balance sheet is the envy of every corporation except maybe Apple. They are probably the best run oil company out there, and have set themselves up with the addition of a natural gas company several years ago to capitalize on what I assume will be an increase in gas prices.  
  • Quarterly report indicates that Chevron actually replenished its reserves in the year 2012 by 112%. Meaning that it has more reserves in the future than what it started in 2012 and produced and sold. Very solid.
  • According to the company’s press release it leads the industry in profit per barrel of oil produced.
  • Has a low debt to equity ratio of 8%. 

Weaknesses

  • A recent refinery fire, and many past spills don’t win the country many friends. Bad environmental record. Oil spill off the coast of Brazil led to legal action and a fine. It could have been way worse.
  • Quoting this fool.com column, John Hofmeister, former CEO of Shell Oil, is “convinced that the energy industry is overly optimistic vis-a-vis the decline rates for shale fields. If he's right, our newly heightened unconventional oil and gas production will fall off faster than is expected.” 
  • Despite its boffo recent quarter, earnings over the last five years risen very very slowly. Part of that of course is due to the huge expenditures in oil production.

Opportunties

  • With governments around the world printing more and more paper money, Chevron (and all oil companies) have a commodity whose price will rise as inflation does.
  • Chevron appears to be concentrating more on developing known reserves in a cost-efficient manner. This might indicate an increase in profits and margins over the next several years.
  • Doing major natural gas exploration, off the Australian coast. Also, in Romania. 
  • Has recently invested $25 billion into its oil field in Kazahkstan.
  • The seemingly eternal chaos in the Middle East has more potential than usual to vault oil prices into the stratosphere, specifically, of course, Iran and its nuclear ambitions.

Threats

  • Google driverless car technologies which I speak about (Part I and Part II) threaten to make cars more efficient, raising mpg rates by eliminating time in traffic, and allowing cars to draft behind one another at close range. This will reduce the demand for gas worldwide.
  • Similarly, a move to electric vehicles Tesla is creating, powering cars from renewable resources, might put a dent in oil demand. This is a still a long ways off on a mass scale, and, I might be among the minority, but I think the driverless car, might be more of a threat. 
  • In general, as the price of oil increases renewables get more competitive. Additionally as renewable energy becomes more efficient, both these factors act as a sort of ceiling on oil's potential price increase.
  • Another major oil spill along the lines of BP’s (NYSE: BP)  in the Gulf of Mexico would destroy the balance sheet and stock price of Chevron. The public and government would have an even shorter fuse for this than before. Chevron was recently in trouble with the Brazilian government as mentioned above, but appears to have cleared this hurdle. However, BP has come under pressure with its government contracts (it is the major supplier of jet fuel for the US military) as a result of the spill. If BP should have more environmental difficulties, public outcry could make for a sudden shift in contracts. 

Bottom Line

25 consecutive years of raising the dividend, and increased reserves of oil bodes well. A 3.6% yield makes the company extra juicy. 


margiecfl owns shares of BP and has no position in any other stocks mentioned. The Motley Fool recommends 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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