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It's difficult to find a weakness when analyzing Chevron Corp. (NYSE:CVX). Consider:

  • Chevron is the second largest oil company behind ExxonMobil (NYSE:XOM). It has reserves of 11.2 billion barrels of oil and a daily production of 2.7 million barrels.
  • It is one of the most diversified companies in the industry, with interests in mining, chemicals and power production, and more than 8,000 gas stations in the U.S. and 9,660 outside the country.
  • Chevron has led the industry in earnings per barrel for the past three years, according to the company's most recently quarterly press release
  • During its recent quarterly and year-end financial release, Chevron reported that it added more than 1 billion barrels of reserves in 2012, which equates to 112% replacement of the reserves it used for the year.
  • It has increased its dividend for 25 consecutive years and has a current yield of 3.1%. And with a payout ratio of just 26%, Chevron has plenty of room to keep increasing it.

Overvalued?

Chevron's stock, currently trading around $115 a share, has more than doubled since bottoming at $55 a share in October 2008. It is up 30 percent from its 52-week low of $96 set in June 2012. Meanwhile, ExxonMobil is only about 16% above its 52-week low, and less than 5% below its 52-week high.

Some believe the stock is overvalued, when considering its price/earnings to growth (PEG) ratio. This valuation metric is figured by taking a stock's P/E ratio over its estimated annual earnings per share growth rate. A PEG of 1 would indicate a stock that is fairly valued; a ratio over 1 is said to be overvalued while a PEG under 1 is believed to be undervalued.

Because its five-year EPS growth estimate is a paltry 0.08%, Chevron's PEG is an astronomical 108. That compares to more fairly priced Schlumberger, which has a PEG of 1.14.

Environmentalists in its home state of California also don't have a lot of positive things to say about the company. Protestors are a common site, accusing the company of oil spills and other harmful actions, not to mention a recent refinery fire.

But few other criticisms of the company and its stock can be found. Of the company's 24 analysts, 17 rate the stock at a minimum rating of "buy."

Recent Performance

The company didn't disappoint during its latest earnings report. Fourth-quarter earnings rose from $5.1 billion in 2011 to $7.2 billion in 2012, a 41% increase. Full-year earnings fell 3% to just over $26 billion. Lower crude oil volumes pushed operating revenues for the quarter down to $56 billion from $58 billion the year before.

Chevron has increased its cash position each of the last three years and reported nearly $21 billion at the end of 2012. Cash flow from operations has grown steadily since 2009. In fact, Chevron generated far more cash from operations through three quarters of 2012 ($52 billion) than it did for all of 2011 ($41 billion). Its ability to generate cash helps explain its minuscule debt-to-equity ratio of 8%.

Its balance sheet is solid as well. Its equity is growing at 10% annually. In addition, the company has used some of its cash to buy back shares, decreasing the number of shares outstanding by 2% over the last five years. The company purchased $1.25 billion of its common stock in fourth quarter 2012 under its share repurchase program. Repurchases for the full year totaled $5 billion. Fewer shares means the value of each share increases.

Exploration

Chevron appears aggressive in its pursuit for more energy sources. It will invest $37 billion this year alone - about the same as Exxon Mobil, despite having roughly half of its market cap.

Chevron acquired property in five new countries last year, grew its presence significantly in the U.S. and bought a 50% stake in a major project in western Canada. It has discovered six new pools of natural gas off the coast of Australia. It is closing in on exploration in Romania for shale gas, which the U.S. Energy Information Administration (NYSEMKT:EIA) estimates will supply Romania for almost 40 years.

That's just the tip of the oil well. Chevron is investing $25 billion in a field in Kazakhstan to increase production there by 25%. It's making a $10 investment in plants in Nigeria and another $12 billion in the deep waters of the Gulf of Mexico.

Chevron's biggest project - in fact one of the largest infrastructure projects in the world - is the Gorgon, a $52 billion plant in Australia that will produce liquefied natural gas when it comes online at the end of 2014. The joint venture will produce an estimated 450,000 barrels a day, half of which Chevron will procure. It's believed to contain enough gas to keep the plant producing for 40 years.

CEO John Watson promises an increase of 25% overall in oil and gas volumes to an additional 3.3 million barrels a day in four years. This would equate to the capacity produced by rival Chesapeake Energy (NYSE:CHK).

Is Now The Time To Buy?

One of the things analysts point out about the attractiveness of Chevron is its earnings on downstream operations, which includes refining and marketing. In the fourth quarter of 2012, Chevron's U.S. downstream operations earned $331 million, compared with a loss of $204 million a year earlier. International downstream operations earned $594 million in the fourth quarter 2012, compared with $143 million a year earlier.

With commodity prices are expected to stay low and negatively impact upstream earnings, Chevron's ability to earn profits from downstream operations gives it an edge over competitors.

Its last 12-month and five-year average gross margins are slightly better than the industry average, while its net profit margins are considerably superior to the industry during both timeframes.

Chevron generates a profit of $24 per barrel of oil, or the natural gas equivalent, versus Exxon's $19.80, which is in line with the industry average.

So while there's no such thing as a perfect stock or an ideal investment - especially in the volatile world of energy companies - Chevron's financials and balance sheet make a strong case for one.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.