In my latest article on Chevron (CVX), I proposed a bull case for the stock. Now I will analyze the impact of recent events on Chevron to check whether there is still a bull case for the stock or not. Chevron just released its fourth quarter earning guidance. In the wake of the release, the share price of the company lost nearly $7 within a few trading days. Some analysts and experts believe that the earnings guidance put a serious dent on the company's growth prospects while other experts believe otherwise. In my opinion, despite the weak fourth quarterly results, the bull story of Chevron continues and I believe that Chevron is a leading integrated energy company with growth prospects, decent valuations, and a solid dividend.
What to Infer from the Fourth Quarter Guidance
The company indicates that production during Q4 fell due to maintenance at the facilities in GOM, Angola and Australia. The weaker oil prices also played a part in the lower margins. The company stated that the average realized price for the third quarter crude oil and related products was $97.17 per barrel in the third quarter and is expected to decrease in the fourth quarter to $90.17 per barrel.
WTI Crude Oil Spot Price
Therefore, the company's upstream business is projected to post lower earnings but the downstream business will offset the negative impact as earnings from the downstream business are expected to be higher than what was reported in the third quarter. The higher downstream business was mainly the result of the absence of the maintenance work at the El Segundo refinery in California. Similarly, on the production front, the company produced 2.56 million barrels per day during the first two months of the fourth quarter down from 2.59 million barrels per day in third quarter.
The results are expected to be released on the 31st of January. However, the comparatively weak results should not harm the bull case of Chevron. Given the weakening crude oil prices, I believe that Chevron's fourth quarter update does not indicate any significant challenges in the future. Let us determine what the future holds for the company.
Upstream Business in Good Shape
The expected results of the fourth quarter are marked by the poor business performance of the upstream business. However, I believe that the poor performance is temporary and the company's upstream business segment is well positioned to contribute higher top line and bottom line growth.
The lower average realized price does not make Chevron a lost cause because the lower cost of production has helped the company to post higher cash margins. The lower cost of production per barrel offers Chevron a competitive edge over other companies within the industry. The figure below exhibits the cash margin of the upstream business of the company in comparison with BP, RDS, TOT and XOM.
In addition to the higher cash margin, Chevron has been putting efforts to increase the production. The company has allocated almost 90% of its budget to its upstream business while only 8% has been allocated for the downstream business.
The higher capital spending was due to the fact that the company has completed several attractive resource acquisitions. In its latest press release, the company announced a $39.8 billion capital and exploration budget for 2014. The declared budget is approximately $2 billion lower than the expected total investments for 2013.This is mainly due to the 75% complete Gorgon development project in Australia. The project is estimated to start production in mid-2015.
The Year 2013is a Peak year for Investments
The year 2013 has relatively been a peak year for investments as the company acquired assets that are expected to generate higher cash flows in the future. The year 2013 was marked with the higher investments across all facilities. Even though these projects will boost the production and increase the cash inflows the deep-water operations in the Gulf of Mexico will be the key driver of revenue for the company.
Chevron's focus on its international upstream segment will comprise more than 60% of 2013's CAPEX of $37 billion and ensure that future prospects will be healthy. However for 2014 the company intends to seek growth opportunities in the upstream business and will spend 90 percent of its total CAPEX in the upstream business.
The amendment in Mexico's constitution brings good news for the oil and gas exploration industry. Companies can now have greater access to the country's resources. With that in mind, Chevron announced that two deep-water platforms will be constructed and are expected to begin producing oil by the end of next year. For these projects, the company announced that it would invest $12 billion.
The total oil production from these two projects is estimated to be approximately230,000 barrels of oil per day.These projects, when completed, will increase the company's deep-water Gulf production by more than 100%. Currently, the company's per day production is 105,000 barrels.
Growth Will be Reflected in the Stock Price
Currently, the company has been trading on a price to earnings multiple of 9.76 while the industry has been trading on a multiple of almost 10. In addition to the lower price multiple the company is also trading on a lower EV/ EBITDA multiple of 5.34 whereas Exxon Mobil is trading at 7.20 and British Petroleum is trading at 5.78. Given the above mentioned growth prospects Chevron does not deserve to be trading at such low multiples and the market should make a correction sooner rather than later.
Moreover, Chevron is currently offering a dividend yield of 3.35% coupled with its fabulous history of repurchasing shares. Combining the dividends and repurchased shares the company is offering a return of 5.5%. Therefore, the company presents itself as an attractive investment due to the current pipeline projects and the company's ability to conduct low-cost operations.
In a Nutshell
- Despite weaker fourth quarter results the company is in good shape to capitalize on the opportunities in the market.
- Chevron's ongoing projects are expected to increase production by more than 25% in the coming years. The increase in production serves as a positive catalyst for the company that is also in line with its long term goals.
- Chevron seems to be more attractive as its operating and net margins, per share earnings, dividends and cash flows are better than the industry averages. I believe that Chevron, with its operating efficiency and anticipated increase in production, offers attractive returns to not only growth investors but also value investors.
- Fundamentally, the company is inexpensively priced and has been paying an attractive dividend yield of 3.35%.