Chevron (CVX) is a U.S. integrated oil and gas company that earns approximately three quarters of its revenues outside the U.S.
Chevron ranks second behind Exxon (XOM) in both market capitalization and absolute EBITDAX. The $246B company earned an EBITDAX of $46.3B last year on revenues of over $230B. Chevron ranks high among its peers in metrics such as ROA and ROE:
Chevron's P/E ratio is quite modest and remains below 10X, while also slightly yielding to Exxon's. The company is trading on EV/LTM EBITDAX of approximately 4.1X and offers a compelling 3.15% yield. Speaking of dividends, the CAGR for the past 12 years has been 8.6%:
Return on Capital Employed (ROCE), a popular metric in O&G, was almost 19% in 2012, which enabled CAPEX of almost $34B. Chevron likes to compare its earnings with peers:
The O&G company especially prides itself in safety of operations:
Here is a more graphical representation:
Chevron has been delivering value to shareholders by means of dividends and share repurchases. Again, a comparison chart is drawn to reflect Chevron's position on the map:
Armed with data from press releases, annual and quarterly reports, analyst presentations, and others, let us quantify the information into a target price for the stock. We will consider the following key factors and methodologies:
1) Market Valuation - Flowing Barrel
2) Market Valuation - Cash Margin
3) Share Buyback Impact
4) Role of Dividends
5) Graham Number
Market Valuation - Flowing Barrel
I have used this method in the past, which proved to be a quick method of evaluating impact of increase in production on Enterprise and Equity Values. This time I have decided to offer readers a historical overview of this metric for Chevron:
As one can see, Price per Flowing Barrel has been steadily on the rise since 2009 (an increase of almost 360%). Debt levels for Chevron have been stable:
Cash has increased 7.5X since year 2000; production has increased by 32.4% since the same year. All this indicates that the market has been treating Chevron extremely well, raising its EV continuously. I felt that I absolutely had to share this observation with readers before I go on to valuation.
Discount Rate - WACC
George L. Kirkland, Vice Chairman and Executive Vice President of Upstream and Gas, projects Chevron's production levels up to 2017:
Based on that, valuation of Chevron's can be derived:
One can compare the PV of Implied Price per share at 5.5% discount rate (current one) and 3.3MMBOED with the current market price of Chevron's share of ~$126. As we can see, the market is trading Chevron at a premium here. This is understandable given Chevron's ability to steadily raise dividends for decades at the highest rate among its peers.
Market Valuation - Cash Margin
I first used this metric with ConocoPhillips because it is an E&P company and any increase in production and/or CFOs directly affects the metric. Results obtained from this method are much less reliable for Chevron due to its nature of an Integrated O&G. Nevertheless, the more methods we can use the greater "level of comfort" we obtain:
Valuation here is a bit lower and less reliable because of two major factors:
1) It is difficult to predict a stable level of growth in cash flows from operations due to a large number of items in the statement
2) This metric is "blended" with earnings from the Downstream, Chemicals, and other businesses Chevron administers
Nonetheless, Cash Margin can be a solid metric in O&G valuation.
Share Buyback Impact
In spite of the seemingly large cumulative figure on Chevron's share repurchasing activity, the reality is more than mediocre. Chevron has bought back ~$35B worth of stock, while Exxon did just over that in the past two years (~$43B). Perhaps, the reason is management's decision to return more money to shareholders in the form of dividends (here, Chevron has been more consistent and paid about 80% of what Exxon spent, given the fact that it is less than two-thirds the size of Exxon's). Here is a history of share buybacks for the last 4 years:
Making projections with the use of the derived rate of declination:
The variability between the "High" and the "Low" estimates is merely 10M shares, or less than 1% of total shares outstanding.
When assessing activities such as dividend payments and share repurchases, it is important to analyze the company's ability to sustain a given level of activity over long periods of time. Hence, we drew a table:
Unlike Exxon and ConocoPhillips, Chevron has had money left over after both buybacks and dividends were paid out. This brings us to a conclusion that Chevron is in fact able to repurchase the number of shares attributable to the "High" estimate. However, it is unlikely given high projected CAPEX and a lucrative opportunity to increase dividends:
Growth in production goes hand-in-hand with asset development, acquisition, and revamping.
Role of Dividends
Dividends have made Chevron famous, especially the recent 13.6% jump in 2012. They have been growing at more than 8% CAGR for the past 12 years. I have assumed that the 8% growth (a little bit below the average) will continue for the next 5 years. This gave me the following projections based on the current annual dividend of $3.51:
The end-figure is already discounted at 2013's Cost of Equity and represents the total amount of dividends expected to be received by the end of 2017.
At LTM EPS of $13.23 and Book Value per Share of $72.27 (2013Q1), the value of Chevron's stock is calculated to be $147. This number seems to be a bit too high, and I would not use it as a basis to my long idea.
Below is given a graphical summary of Chevron's fair value per share:
As seen in the picture, Dividends play a far more important role that share buy-backs as opposed to ConocoPhillips and Exxon. For readers' convenience I have created a distribution graph for the value drivers:
In contrast to Exxon, where shareholder activities added more than one-third of worth to the stock's fair value, Chevron is betting heavily on CAPEX (which will increase production to the estimated levels) and not-so-tax-friendly dividends.
Even though I have assessed Chevron to be worth around $132 per share and some banks and brokerages have given even higher valuations, I think that Chevron is trading at a razor-thin discount to its fair value. In other words, this is not a bargain stock: new investors will be buying into dividends and the company's production prospects. Nevertheless, as long as one buys at fair value and not above it, it is justifiable. Again, my target is around $132 per share without too much upside beyond that.