The Best Buy in Energy?
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Chevron Corp. (NYSE: CVX) is one of the largest integrated energy companies in the world. The energy giant with a market cap of over $220 billion is the second largest energy company in the US and the sixth largest across the globe. The company is involved in oil and gas exploration, production, refining and marketing of primary and secondary petrochemical products, and is also involved in power generation. Chevron has operations in more than 180 countries, and is also involved in the development of fuel cells, photo voltaic cells and advanced batteries along with active ongoing research in the field nanotechnology. Since chevron mainly deals with the production, refining and marketing of petrochemical products, it profits from surging oil prices.
Chevron, with its core refineries accounting to up to 75% of its production, can produce up to 2 million barrels of oil per day. The core refineries are located in key areas like Singapore, Thailand and South Korea. Chevron provides aviation fuel to more than 1000 airports globally, and is positioning itself to grow on a larger scale. Here are a few prospects why I think that Chevron would turn out to be a great investment.
The buyback scheme
The energy giant is targeting a quarterly repurchase of shares worth $500 billion to $1 trillion. The buyback program was initially launched in 2010, but when into hibernation due to unknown reasons. Now that the board has approved the repurchase, we not only have investors investing in Chevron, but also the company investing in itself.
Vision of the company
Chevron is planning to spend $28.5 billion towards oil exploration, production and development of natural gas related products, so as to increase its reach around the globe. The company will also be spending around $3.6 billion to improve the efficiency and production levels of the existing refineries in the US. Chevron’s current oil and gas development ongoing projects are rated as the best in the world, targeting a 20% increase in projects by 2017. The company is also trying to diversify its portfolio, by investing in the fields of geothermal energy, solar technology and other forms of renewable energy. Additionally it is also involved into waste water treatment.
On July 30th, Chevron announced that it will be developing Lianzi field, located between Congo and Angola. The development is scheduled to be completed by 2015, and is likely to generate a maximum of 46,000 barrels of oil per day.
On June 20th, it was announced that Chevron and Kosmos Energy Ltd have teamed up in an oil exploration venture in Africa and South America. The companies will try to explore oil fields in almost 2.8 million acres of land and water bodies.
The company has ongoing ventures in South America, Australia, Iraq and mainly the Gulf of Mexico. These projects highlight the vision of the company, and the intent that it’s not bogged down by the shackles of a weak oil demand. The company is diversifying its portfolio in almost every regard, and is clearly focusing on the next 5 to 10 years.
Competitive edge over others
Chevron’s largest competitors include British petroleum (NYSE: BP), Royal Dutch Shell (NYSE: RDS-A), Hess Corp. (NYSE: HES) and Exxon Mobil (NYSE: XOM), and the point to notice here is that Chevron currently enjoys the highest profit margin per barrel. The company has a profit margin of $26 per barrel compared to the $19 of Exxon Mobil, and the margins fall even further when we talk about other competitors.
Talking about comparative results, Hess continued to miss the profit estimates for the past two quarters, and in the last quarter its profit shrank considerably. BP also missed the expectations and posted a net loss of $1.3 billion in Q2 FY2012 compared to a profit of $5.7 billion in Q2 FY2011. RDS too could not meet the analyst’s expectations this quarter and the stock took a beating. Chevron on the other hand was able to impress the street by posting a profit of $7.21 billion or an EPS of $3.66 compared to the estimated $3.24 proving to be the best investment. Despite the gloomy past quarter and a drop in profits this quarter, the results were not dismal compared to its peers. Looking at the numbers, it’s not hard to guess that Chevron’s currently the best bet in the energy generation sector.
The shares of CVX trade at 8.3x P/E and a 2.2x PEG. The shares don’t look undervalued, but the growth prospects still do not lose the shine. The company has a gross profit margin of 33.23%, and a net profit margin of good 10.8%. The company yields a healthy 3.2% and pays out 24.49% of its earnings as dividends. This stock could actually make it to the conservative dividend portfolios.
It’s not hard to conclude that Chevron turns out to be the best investment when it comes to investing in the oil and energy production sector. The company is not only good fundamentally, but also posted positive results. Additionally the profit margins are the highest and with the gradual recovery in the oil prices, the opportunity to lock in profits will be cashed in first by this energy giant. The stock is rated as a buy for the medium to long term investor.