Why Is Chevron Hoarding Cash?

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

Chevron (NYSE: CVX) has amassed a large volume of cash, more than $21 billion, which has left investors wondering whether the organization is bracing for an increase in oil prices or planning to acquire another business.

The firm’s cash levels have increased by 60%, and while they come nowhere near those of technology giants like Apple’s, it is more than enough to add to their property portfolio significantly. From an industry perspective, Exxon Mobil (NYSE: XOM) is nearly twice as big but has just $17 billion cash.  Chevron has less than $2.8 billion in debt maturing before 2015.

The company insists that it is only prudent to have large stockpiles of cash in the current unstable economic environment as it continues to develop projects globally. However, John Watson, Chevron’s CEO, has admitted that they are in a position for “acquisitions.”

Some analysts are expecting Chevron to acquire what’s left of Chesapeake Energy (NYSE: CHK), which is in a real cash/debt bind but still has a number of premium properties. Chesapeake is down 36% in the past year with no relief in sight. Chevron, up 15.4%, is in an increasingly good position.  The collapse of natural gas prices in the U.S. is creating this environment. Chevron underperformed the S&P 500 (NYSEMKT: SPY) this year, which fuels suspicions about its stockpiling cash.

Unlike Exxon, Chevron was not exposed to the U.S natural gas industry and therefore its margins were not as hard hit as others. The shale gas boom had induced many local companies to spend heavily on natural gas extraction and exploration techniques, which led to several breakthroughs in R&D. But the industry went through a classic boom/bust cycle, over-supplying a market without an offsetting increase in demand or the infrastructure to increase demand. High interest expenses coupled with the downward pressure on prices has put the entire industry under financial stress. This creates a perfect opportunity for organizations that are loaded with cash reserves to go on a shopping spree.

The current value for Chesapeake is $12.9 billion, and it comes with its valuable oil and natural gas reserves. It is the nation’s second biggest gas producer in US, after Exxon, so there is certainly a unique opportunity here for Chevron. But with its $14 billion debt and extremely volatile income stream can Chevron pull it off -- and more importantly, should they? Chesapeake’s finances are why a formal bid for the company has not happened yet.

On the other hand, Deutsche Bank believes that Hess Corporation (NYSE: HES) would make a better investment, albeit more expensive as it operates in the Bakken fields, yielding both gas and oil. At this point smaller producers, often attract the majors because of their value.  Junior producers that have done the exploration work are often good targets as tey have taken all the risk of development but have not extracted the easy revenue.  In 2010, Chevron bought Atlas Energy for $3.2 billion.

Either way, Chevron has to spend this money as the margins in oil and gas are too thin to be sitting on a pile of non-productive assets in an age of dwindling reserves and rising demand. Interest rates are zero-bound and their credit is good, AA according to Morningstar, both Debt to Equity and Debt to Asset ratios are very low versus industry average.  Chevron has its options available to make a deal to acquire excellent assets at distressed prices.


PeterPham8 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Motley Fool newsletter services recommend Apple and 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.If you have questions about this post or the Fool’s blog network, click here for information.

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