Chevron: Indian Opportunity, Venzuelan Risk (CVX)

Jun. 1.06 | About: Chevron Corporation (CVX)

Buy-recommended Chevron Corporation (NYSE:CVX) offers a 39% appreciation potential to net present value of $85 a share. At that point the stock price would mirror a long-term oil price of $50 a barrel compared to the current quote for oil delivered over the next six years of $72. A new investment with India’s largest refinery may lead to mutually advantageous deals in crude oil and natural gas that would fuel India's overall growth. In Venezuela, rhetoric from President Hugo Chavez will probably drive up the value of Chevron’s resources outside Venezuela more than it will reduce Chevron’s future opportunities in that Latin American country. Quarterly results reported on April 28 reflect the dip in February's oil refining margin that has since been restored. Chevron's stock value is spread over the following sector concentrations: 58% oil, 37% downstream and 17% natural gas. Minimal financial risk is indicated by a 0.11 ratio of debt to present value.

Energy for India
According to Thomas Friedman's book The World is Flat, there is much optimism and excitement about the new political and economic vitality of the Indian subcontinent. As well, Jeremy Siegel, in his book The Future for Investors, presents an even rosier picture of the potential for synergy between a productive, young population in India and Asian countries and an aging population in the U.S. and Europe. To fulfill such expectations, India knows that it needs imported energy to make up for its comparatively meager indigenous resources. Thus, Chevron’s acquisition of a 5% interest in a project by India’s largest oil refiner, Reliance, to construct a new refinery in Jamnagar may have a more far-reaching significance than it seems at first glance. Reluctant to recognize how valuable energy really is, India has been losing out in the global scramble for energy resources. A close relationship with Chevron may lead to more jointly beneficial upstream and downstream investments.

Populist Politics in Venezuela
An optimistic outlook for India contrasts with the current pessimistic outlook for Venezuela. The sense is that President Chavez has cheated the investors of the world by changing the rules after billions of dollars have been committed. Yet, we think that Venezuela accounts for very little in Chevron’s stock price and there are mitigating factors which give us continued confidence in the company.

Venezuela appears in three lines in our table of oil production and reserves for Chevron (see table below). There is an unspecified amount for Venezuela in “Other International”. The Orinoco oil sands project, Hamaca, accounts for 4% of oil reserves and 2% of last year’s production. The Maracaibo heavy oil project, Boscan, accounts for perhaps 6% of reserves and production. Since oil is 58% of Chevron’s present value, Venezuela may be 6% of Chevron’s present value. As a result, if Venezuela were worth zero and nothing else changed, Chevron’s McDep Ratio would increase by 0.06 to 0.81.

[click to enlarge]

Nor is Venezuela lost, yet, and it probably won’t be a total loss. Chevron has been in Venezuela for more than twenty years. Without admitting as to how many decades ago we were at Chevron, we worked on the design of the pumps and tanks for the Boscan refinery. Boscan crude oil is as thick as tar.

In addition, there is a self-correcting offset to political bluster. The problems of Chevron are shared by nearly all of its mega cap peers. Mr. Chavez’s actions have had a negative impact on Venezuelan production. Lower supply drives up the commodity price and thus encourages development elsewhere. Not only has investment capital fled, Venezuelan nationals are working in Alberta rather than in their home country.

Refining Crack Restored
Futures investors have difficulty anticipating refining margin, or crack, which is the difference between the prices of heating oil and gasoline compared to crude oil. As a result, there are no publicly quoted six-year futures for refining crack and we are left with one-year data which is volatile. For a brief period during the first quarter the crack dropped so low that it was zero or negative for one or more days on a spot basis. It was almost like an inverse of the hurricane induced spike late last year. Now the one-year crack has returned to the 40-week average (see chart below).

Chevron’s earnings followed the trend with a dip for the downstream in early 2006 compared to late 2005. Our long-term expectations are for a refining crack of about $10 a barrel. The trend to cleaner fuel that favors natural gas also favors more intensive refining. Not only must refined products be cleaner, they must also be derived increasingly from heavy oil.

Written May 1, 2006
Kurt Wulff's McDep Associates offers realtime, independent research services for investors in the energy and utilities sectors. For more information, go to or email Mr. Wulff at