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Shares of Chevron (NYSE:CVX) saw a modest correction on Friday after the company released its third quarter results.

Investors are disappointed by the fact that Chevron missed its own production guidance, while capital expenditures will come in above planned levels.

Despite these short term headwinds, shares offer great appeal. Chevron is well capitalized, offers growth prospects and trades at fair valuation multiples.

Third Quarter Results

Chevron generated third quarter revenues of $58.50 billion, up 0.8% on the year before.

Income attributable to shareholders fell by 5.8% to $4.95 billion. On the back of share repurchases, earnings per share fell slightly less, coming in at $2.57 per share. This compares to last year's earnings of $2.69 per share and consensus estimates of $2.71 per share.

Chairman and CEO John Watson commented on the third quarter developments, "Our third quarter earnings were down from a year ago, primarily reflecting lower margins for refined products in the current period. We continue to make good progress on our major capital projects. Construction continues, and important milestones are being reached, on our Gorgon and Wheatstone LNG projects in Australia. Important interim construction goals have been recently reached."

Looking Into The Results

As usual, earnings were driven by the upstream segment, in which earnings fell by nearly 1% to $5.09 billion. Downstream earnings fell by 55% to $380 million, which looks bad. However, the earnings fall is rather limited in light of the downstream results reported by other oil majors in recent days.

Worldwide net oil-equivalent production rose from 2.52 million to 2.59 million barrels per day. Project ramp ups in the US, Nigeria and Angola and lower maintenance at Tengizchevroil, are the driver behind production growth. Note that Chevron generates roughly 80% of upstream earnings abroad. The reported 2.7% production growth was the fastest pace over the past three years.

Downstream earnings were impacted by lower margins and higher repair and maintenance activities. This was offset by higher earnings at the 50% owned Chevron Phillips Chemical Company.

Valuation

Chevron ended the third quarter with $18.6 billion in cash, equivalents, time deposits and marketable securities. Total debt stood at the same number, for a flat net debt position.

For the first nine months of the year, revenues came in at $172.7 billion, down 4.8% on the year before. Earnings came in at $16.5 billion, down nearly 13% compared to a year earlier.

At this pace, annual revenues of $230 billion should be attainable as earnings could come in around $22 billion.

Trading around $118 per share, the market values Chevron at $227 billion. This values the equity in the firm at 1.0 times annual revenues and 10 times annual earnings.

Chevron currently pays a quarterly dividend of $1.00 per share, for an annual dividend yield of 3.4%.

Some Historical Perspective

Long term holders in Chevron have seen solid returns driven by the appeal of production growth, and more recently attractive dividend yields. Over the past decade shares have tripled, increasing from $40 in 2004 to current levels around $120 per share. So far this year, shares have risen some 10% after peaking around $127 per share in July.

Between 2009 and 2012, Chevron has increased its annual revenues by a cumulative 40% to nearly $242 billion. Net earnings rose by 150% to $26.2 billion over the past year. On top of this, Chevron has retired nearly 3% of its share outstanding over the past year.

Investment Thesis

Despite the solid returns and growth of operations, investors are not too pleased with the latest earnings report. Earnings fell short of consensus estimates, while Chevron admits full year costs are increasing, making it difficult to meet the company's targets. Note that Chevron previously guided for capital expenditures just north of $36 billion and oil-equivalent production of 2.65 million barrels.

Chevron now anticipates to spend some $40 billion on capital expenditures for drilling, platforms and other capital projects. Investors seem to be a bit cautious, wondering if these huge sums of money are being invested wisely, with capital expenditures running at twice reported earnings.

To offset the high capital expenditure requirements, Chevron is contemplating selling some oil & gas assets which have lower returns. Chevron notes that it currently finds itself in a capital intensive period. The Australian LNG projects and deepwater developments in the Gulf of Mexco are set to deliver significant growth going forward.

Note that once the work on the huge Australian LNG Gorgon project is done, capital expenditures will come down, while cash flows will increase giving the company much more flexibility. That being said, Chevron currently operates with a flat net debt position. At the same time, investors receive appealing dividends of a 3.4% yield at the moment, combined with modest share repurchases.

Back in April of this year, I last took a look at Chevron's prospects. At the time, shares were trading around $120 per share, as I noted that shares continued to offer appeal at all-time highs. Note that Chevron is targeting a 25% increase in production in the coming four years, based on the Angola expansion and the Gorgon project in Australia, expected to come online next year.

I reiterate my stance from that time. Chevron is appealing at 10 times earnings, while operating with a solid balance sheet with essentially zero net debt. Shareholders furthermore receive solid cash flows in terms of a solid 3.4% yield, accompanied by share repurchases. On top of this, shareholders could see continued production growth going forwards.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Chevron - Buy This Preferred Oil Major At Short-Term Dips