Chevron Corporation's (CVX) stock has shown a compounded annual growth rate of 12.9% over 43 years. In the last ten years, it has appreciated 265.12% - from $32 in February 2003, the stock is now trading at $117.15, which is only a dollar and forty cents away from its 52-week high (achieved in September 2012), which is also its 10-year high.
If the news doing the rounds of the market is anything to go by, the stock still looks good for further appreciation.
Chevron is one of the world's biggest oil producers, the second largest among U.S. oil companies. The company is involved in practically everything and anything concerned with oil and natural gas. From exploration to transportation through international oil export pipelines to storage, it has a finger in every pie. The company manages its investments through domestic and international subsidiaries and affiliates and provides administrative, financial, management and technological support to them.
In its most recent quarter results (ended December 2012) its net income rose by 41%, from $5.25 billion to $7.25 billion. Earnings per share are $13.32 and at $117.15, the stock trades at an attractive P/E of 8.79.
Why Is Chevron Still a Buy at This Price?
There is more than one reason but for starters it should suffice that at CMP, the stock provides a dividend yield of 3.07, which is more than one gets on a 10-year T-bill.
Standard & Poor's maintains a Dividend Aristocrats Index that measures the performance of blue chip companies within the S&P 500 Index that have been increasing their dividend payout every year consecutively for 25 years or more. This year, Chevron made it to the S&P 500 Dividend Aristocrats when it raised its dividend this year also.
A look at the chart below will give a fair idea of the measure of performance of companies included in the "Aristocrats."
If that is not reason enough to buy, here is a look at what the company has been doing or plans to do.
Chevron has the second highest oil reserves, second only to Exxon Mobil Corporation (XOM) and is leaving no stone unturned to expand its oil assets.
- Bloomberg reports that plans are afoot in regard to Chevron expanding its proposed LNG export terminal off Canada's Pacific Coast. This is seen as an effort to prepare for the time when it will be able to monetize the gas reserves in the Liard and Horn River formations other than those covered by the project that it is currently involved in partnership with Apache Corp. (APA).
- Another Bloomberg report talks of Ukraine seeking an agreement with Chevron for sharing production of shale gas. It is a move that indicates that the country does not want to rely solely on Russia for its energy needs any longer.
- Moving further east, Chevron has invested in Australian shale gas as well. Australian shale oil/gas industry is in its nascent stage but the potential is huge. According to an estimate by the U.S. Energy Information Administration, at 396 trillion cubic feet, Australia's recoverable shale gas reserves are more than Canada's gas reserves.
Some of these investments may seem to be trivial considering Chevron's size and scope of operations but analysts view it as a smart move and also an investment in future. Due to oversupply of shale gas, gas prices in the U.S. there is a pressure on gas prices. Gas prices offered by Australian and Asian suppliers however are 5 times those prevailing in the U.S. because in Asia gas prices are based on long-term crude oil contracts.
Occidental Petroleum Corporation (OXY) is perhaps among the most ignored energy companies. In the last one year, the shares of the company have fallen by almost 21% and currently trade at an attractive price-to-book value of 1.65 and a trailing twelve month forward P/E (December 2014) of 10.61. Most of this has been due to sentiment-based sell off experienced by smaller oil and gas companies.
Marathon Oil (MRO) is another junior oil and gas that presents a good buying opportunity. Oppenheimer raised its target price for MRO shares from $40 to $45 resulting in its price hitting a 52-week high. Marathon Oil is among the few energy and power companies that have a positive free cash flow - MRO's free cash flow is estimated at $900 million and expected to be in the region of $1.5 billion in 2014. A $23.71 billion market cap company, at $33.50 MRO shares trade at only 1.30x book value and forward P/E ratio of 10.47.
Outlook for Oil and Gas Industry
In recent times, U.S. oil and gas industry has been characterized by the following game changers:
- Oil prices are strengthening and somewhat seem to be settling between $90-100 a barrel in light of the continued unrest in the Middle East and the Eurozone bailout plan.
- Shale gas - gas trapped in dense sedimentary rock or shale formations - is slowly but steadily moving the country towards energy independence.
- Demand from emerging and developing markets continues to grow.
With the world population touching 7 billion and the fact that whatever oil was easily discoverable has already been discovered and has been or is being expended, price of crude is unlikely to come down from present levels. Domestic gas prices however are likely to be restrained and an upside is unlikely.
Despite sluggish growth seen in developed western economies, in light of global demand for oil and gas the long-term outlook for the energy industry remains fairly positive. As long as the third world countries continue to grow and global output does not keep up with it, investment in oil and energy stocks of companies with healthy balance sheets will continue to remain attractive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.