Chevron: Poised For Growth

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 |  About: Chevron Corporation (CVX)
by: Catalyst Investments

In 1876 Demetrius Scotfield and Frederick Taylor, working for California Star Oil Works, were exploring the Santa Susana Mountains for oil and stumbled upon Pico Canyon. It was riddled with wasps, rattlesnakes, underbrush, but in September of that year, they started drilling and found oil. It was such a large find that they lacked the resources to fully capitalize on the find. Meanwhile, Col. Charles Felton formed Pacific Coast Oil just seven months prior to the find and did have the resources to capitalize on the find. Felton bought out California Star Oil and took advantage of the oil find that positioned California as an oil-producing state. Many years later, Pacific Coast Oil would become the company that we know today as Chevron (NYSE:CVX).

The name "Chevron U.S.A Inc." actually did not officially come about until 1977 when six domestic oil and gas operations merged together to consolidate and build a nationwide identity. In 1970, the price of one share of Chevron was just $3.27 or $19.57 if you adjust for inflation. The current price holds at around $120 which translates to about a 4% average rate of return over a 43 year period not counting the four 2 for 1 splits that took place in 1973, 1981, 1984, and 2004. They have had tremendous success over the more than 100 years that they have been in business. Their revenue has increased by an average of 1.83% over the past five years with an astonishing $242 billion dollar revenue total for 2012.

According to International Energy Agency, Russia, China and Saudi Arabia were the top three countries that had the most demand growth for oil in 2012. Russia came in at 4.4%, China had 4% growth, and Saudi Arabia demand grew by 3.9%. In contrast to this, the demand for oil in the United States last year stayed stagnant at 0% growth. Some analysts attribute this to the slowed economic recovery that is currently taking place in the economy. The opportunities for Chevron in these countries are substantial considering the growing demand for vehicles in China. The CAAM (China Association of Automobile Manufacturers) is predicting automobile sales to increase by 10% next year. China is going through an industrial boom and as wealth starts to spread throughout the population, more and more people are lining up buy cars. If these predictions are correct, Chevron along with other oil producing companies and countries will continue to line their pockets with more profits.

Fossil fuels are currently the backbone of our energy system. We need it to fuel our cars, heat our homes, keep the lights on, and to keep our cell phones charged. Only a very small percentage of our current energy production comes from renewable sources. Chevron and other energy companies are aware of this and will be forced to evolve the way that they do business. The future demands of our planet depends on finding new, renewable, and affordable sources of energy to sustain our planet and our growing population. Energy companies are starting to explore and invest in new ways to power our earth. Fossil fuels are plentiful currently, but with increased demand over the coming years and a finite supply, other long term solutions must be developed.

Chevron is currently developing biofuels and systems to harness solar and geothermal power. Geothermal projects in the Philippines at Tiwi and Makiling-Banahaw, and the Salak and Darajat fields on Java in Indonesia are currently providing over 1,200 Megawatts of power to millions of people in the surrounding areas. Chevron is currently assessing other areas around the world that have potential to provide more of this clean, renewable and efficient source of energy.

Chevron is also working on all three different generations of biofuels. The first generation is made from sugars and starches, the second from non-edible plant materials, and the third comes from algae and other microbes. One area that Chevron has taken special interest in is "green crude" technology. These biofuels are very similar in chemical makeup to fossil fuels so that they would be compatible with current engine designs and energy infrastructure. They are working with Catchlight Energy and Weyerhauser Company to make the type of biomass to make this biofuel readily available and cost-effective. Lastly, Chevron has a subsidiary named Chevron Energy Solutions that specializes in developing solar energy solutions. They are mainly focused on installing solar energy for education institutions right now. The largest projects that are currently in operation are the South San Francisco Unified School, East Union High School District, Contra Costa Community College District, and the Los Angeles County Metropolitan Transportation Authority. Another subsidiary of Chevron, Chevron Technology Ventures, is a company that evaluates emerging technologies such as newer and more efficient solar cells that will eventually make solar a realistic option for affordable and renewable energy in the future. It is apparent that Chevron is committed to branding themselves as an energy company and not an oil company. This essential differentiation will secure their future in the energy sector.

Chevron has had much success in their history, but recently there has been the target of criticism and legal review. Chevron recently contributed $2.5 million to the Republican Super PAC for the election in November last year. Chevron was charged by Public Citizen, Friends of the Earth-US, Greenpeace, and Oil Change International for violating the 1940 Hatch Act which clearly prohibits political contributions by corporations that receive federal contracts. Over the past 2 years, Chevron has received over $1.2 billion in federal contracts, mostly from the Department of Defense. The oil industry has had a vested interest for a long time in keeping Republicans in Congress because they fight very hard to preserve the tax breaks that many of these oil corporations receive. According to the Center for Responsive Politics, 90% of the industry's campaign contributions went towards Republican candidates in the 2012 election cycle, an increase from the recent measurement of 70% before the 2012 elections. The industry as a whole spent $49 million in campaign contributions for the 2012 election cycle. The investments have paid off for them as congressional Republicans have passed legislation to increase drilling, cut Environmental Protection Agency regulations, as well as guarded the previously mentioned tax breaks they currently receive. Considering the net income of Chevron was over $26 billion in 2012, $2.5 million was a small price to pay to help legislative decisions go their way. Unfortunately they might pay another price in legal settlements and the court of public opinion.

Chevron's history is extensive and full of innovation, success, and the American spirit. They continue to make strides to become one of the most prominent energy companies in the entire world. If Chevron is able to evolve their business to meet changing environments and demand, there is no doubt that Chevron will not run of steam anytime soon.

Additional Disclosure: Catalyst Investments is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. This information is not investment advice or a recommendation or solicitation to buy or sell any securities. Catalyst Investments does not purport to tell or suggest which investment securities readers should buy or sell. Readers should conduct their own research and due diligence and obtain professional advice before making investment decision. Catalyst Investments or anyone associated with Catalyst Investments will not be liable for any loss or damage caused by information obtained in our materials. Readers are solely responsible for their own investment decisions. Investing involves risk, including the loss of principal.

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.