Emerging Positive Catalysts Make Chevron a Promising Opportunity
Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
One of the world’s largest publically tradable energy company’s Chevron (NYSE: CVX), has seen its share price remain relatively flat for the year to date underperforming the S&P 500 by 3%. This poor performance has been on the back of a poor full year 2012 result, declining crude prices, increased legal risks and cost blowouts at key projects. But there are now a range of positive catalysts emerging that I believe bode well for Chevron and should drive its share price higher, making now the time for investors to consider the stock.
Chevron is the only integrated oil and gas major with a material position in Latin America
Unlike other integrated oil and gas majors Chevron still has a significant presence in Latin America and is the only one to have a presence in that region’s largest oil producer Venezuela. The company has also been working on increasing its presence in the region giving it a dominant position over its peers such as ExxonMobil (NYSE: XOM), BP (NYSE: BP) or Royal Dutch Shell.
Chevron recently embarked on a partnership with Argentina’s state controlled oil company YPF to exploit the vast shale oil and gas reserves of the Vaca Muerta. The company has also entered into a strategic partnership with Colombia’s state controlled Ecopetrol to explore and extract natural gas in Colombia, making it one of the largest natural gas producers in the region. Furthermore, this also makes it one of the largest suppliers of natural gas to Venezuela, which depends on natural gas as a key source of energy production.
This I believe bodes well for the company’s continued growth, despite the additional political and economic risks this creates for Chevron, with Latin America set to become a dominant oil and gas producer. Already it has been speculated that the Vaca Muerta region in Argentina, maybe the world's largest non-conventional oil and gas resource with it estimated to have over 22 billion barrels of oil equivalent.
Chevron’s outstanding legal risks are diminishing
By the end of 2012 Chevron found itself facing weighty legal risks with significant potential financial impacts. The most significant being the civil and criminal prosecution for two oil spills in Brazil, which have a potential financial impact of $20 billion. It also appeared to be increasingly likely that an Ecuadoran judgment made against Chevron in 2011 for environmental damage in Ecuador would be enforced with the plaintiffs seeking enforcement action in a range of foreign jurisdictions. But recent events this year indicate that Chevron’s legal risks are diminishing.
In February 2013, Brazilian authorities dropped criminal charges against Chevron and its drilling platform operator Transocean, but Chevron is still facing potential damages of $20 billion for two civil lawsuits brought by Brazilian authorities. Towards the end of 2012 the Ecuadoran plaintiffs sought to enforce the judgment against Chevron in Argentina and Canada where Chevron has considerable assets, which saw Chevron’s assets in Argentina frozen.
But in May 2013, a Canadian court ruled there was no merit to the Ecuadoran judgment and refused to recognize it, preventing its enforcement in Canada. This still left Chevron’s considerable assets in Argentina frozen, endangering its strategic partnership with YPF to access the vast reserves of the Vaca Muerta. But in June 2013, Argentina’s Supreme Court lifted the order freezing Chevron’s assets allowing it to proceed with the joint venture. All of which indicates that Chevron’s legal risks are diminishing leaving it well positioned to continue developing its Latin American assets.
Management’s actions demonstrate confidence in Chevron’s future
During the first quarter 2013, Chevron purchased $1.25 billion of common stock under its share buyback program. This has reduced the number of common shares outstanding thereby increasing the value of those shares that remain outstanding.
Management also approved an increase in Chevron’s dividend payment by almost 11% to $1 per share, ensuring that the company continues to pay a dividend with a healthy 3.2% yield. It also ensures that Chevron’s dividend continues to grow at a steady rate with a compound annual growth rate of around 4%.
This dividend yield is also appealing in comparison to Chevron’s peers, being higher than Exxon’s 2.7%, but lower than BP’s 4.9% as the table below illustrates.
Source data: Chevron, Exxon and BP Investor Relations.
This I believe makes Chevron an appealing core investment for any income focused portfolio.
Chevron’s valuation is appealing
Despite these positive catalysts, the key question for investors is whether Chevron is cheap at its current price and with an enterprise value to EBITDA ratio of five and a price to operating cash flow per share ratio of six I believe that it is.
Furthermore as the table below shows, these ratios are quite appealing in comparison to its peers, including the largest publically tradable oil company Exxon and BP.
Source data: Chevron, Exxon and BP Financial Filings 1Q13.
While BP does appear cheaper than Chevron on the basis of enterprise value to proven reserves and enterprise value to barrels of oil equivalent produced daily, it should be remembered that BP is still carrying the burden of the Macondo settlement.
Chevron’s risk metrics are also appealing with its low debt to equity ratio of 0.08, along with a debt to EBITDA ratio of 0.3 and operating cash flow to debt ratio of 2.6. They also compare favorably to Chevron’s peers as the table below illustrates and are considerably superior to BP’s.
Source data: Chevron, Exxon and BP Financial Filings 1Q13.
All of which indicate a solid balance sheet and a particularly low level of leverage. This leaves Chevron well positioned to raise additional debt if required to make further investments in the development of its operations.
The spate of legal and other risks that Chevron experienced in 2011 through to 2012 has seen the company’s share price perform poorly and this has created a timely opportunity for investors. This is particularly the case with signs that these risks are diminishing combined with a solid balance sheet and an appealing portfolio of projects under development.
Matt Smith has no position in any 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!