As an oil & gas investor who sees a company's cost-cutting efforts as a very positive catalyst, I've decided to shift my focus to one of the bigger names in the sector and highlight several reasons behind my decision to remain long on shares of Chevron (CVX).
#1 Recently Announced Cost-Cutting Initiative
On Friday, January 17 Chevron announced that it was working with Jefferies Group LLC to find buyers for at least four assets that include its natural gas storage facility in West Texas, a crude oil terminal near the Gulf of Mexico, and at least one of its pipelines in Louisiana.
This announcement comes in the midst of several other diversified oil & gas plays shedding assets and could fetch as much as $1 billion. Matthew Monks of Bloomberg recently noted that "a number of diversified energy companies which include names like Royal Dutch Shell (RDS.A) and Chesapeake Energy (CHK) have also been looking to sell or spin off transportation and storage operations over the past 12 months".
In my opinion, a company that regularly sheds its underperforming assets not only understands the importance of cash preservation but also understands the importance of enhancing shareholder value over a prolonged period of time.
#2 Near-Term Trend Behavior Could Create An Attractive Entry Point
On Friday, shares of CVX, which currently possess a market cap of $228.33 billion, a forward P/E ratio of 10.31, and a dividend yield of 3.35% ($4.00), settled at a price of $119.29/share. Based on their closing price of $119.29/share, shares of CVX are trading 2.82% below their 20-day simple moving average, 2.09% below their 50-day simple moving average and 0.78% below their 200-day simple moving average.
These numbers indicate a short-term, mid-term and long-term downtrend for the stock, which would normally signal a moderate selling mode for most long-term investors. That being said, I actually think this creates somewhat of a buying opportunity especially since shares are trading at just over 10x forward earnings and currently yielding 3.35%, which is much better than shares of Exxon Mobil (XOM) which were trading at 12.6x forward earnings and only yield 2.54% ($2.52) as of Friday's close.
#3 A Look At Chevron's Upcoming Earnings
On January 9, 2014 Chevron announced that its Q4 earnings would be comparable to its Q3 earnings as both U.S. oil-equivalent production and worldwide out fell 0.77% and 1.16%, respectively. Analysts are currently calling for Chevron to earn $2.69/share on revenue of $63.68 billion during Q4 2013.
From an upstream and downstream perspective, upstream earnings are expected to be lower on a quarter-over-quarter basis while its downstream earnings should perform better-than-expected on a quarter-over-quarter basis.
Interim Upstream Performance
If the company can maintain the pace at which it anticipates U.S.-based natural gas production to be based on the first 2 months of Q4, upstream operations have a good chance of surpassing Q3 production levels by a margin of at least 4.5%-to-5.0%.
(Source: Company Update)
From an international standpoint, and considering the work suspensions that took place in both Australia and Angola, I think the company's international upstream operations could surpass Q3 production levels by at least 2.5%-to-3.0%, based on the pace that was established during the first 2 months of Q4.
Interim Downstream Performance
If the company can maintain the pace at which it anticipates its U.S.-based refinery inputs to come in at, (based on the first 2 months of Q4 in which it reported 858 MBD), I think Chevron's Q4 downstream performance may have the ability to surpass its Q3 performance of 831 MBD by a margin of at least 7.5%-to-9.0%.
(Source: Company Update)
From an international standpoint, I feel that international refinery inputs could surpass Q3 production levels of 885 MBD by at least 4.0%-to-5.0%, based on the pace that was established during the first 2 months of Q4 (876 MBD).
For those of you who may be considering a position in Chevron, I strongly recommend keeping a close eye on the company's plans to continue to shed underperforming assets, its ability to improve both upstream and downstream operations over the next 12-24 months, and any potential move such as another dividend hike that would enhance shareholder value.