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Summary

  • We pitch two companies from the oil and gas sector, Chevron and Total, against one another in the latest installment of our Head-To-Head series.
  • The article focuses on the relative strengths and weaknesses of Chevron and Total based on business performance and sustainability/dividends/forecasts.
  • It ends with discussion of the current valuations of the two companies, and details whether Chevron represents good relative value at current price levels.

Chevron Background

Chevron (NYSE:CVX) was founded in 1879, and is headquartered in San Ramon, California. It is engaged in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas; liquefaction, transportation, and regasification associated with liquefied natural gas; transportation of crude oil through pipelines; and processing, transportation, storage, and marketing of natural gas, as well as holds interest in a gas-to-liquids project. The Downstream segment engages in refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products through pipeline, marine vessel, motor equipment, and rail car; and manufacturing and marketing commodity petrochemicals and fuel and lubricant additives, as well as plastics for industrial uses.

Team Money Research Rating

Our investment philosophy is to focus on company fundamentals and identify stocks that are displaying strong business performance, that operate sustainably, and that pay a decent, well-covered dividend.

We analyze each company relative to the other on the following criteria within each of our two main buckets:

Business Performance

  1. Return on equity
  2. Return on assets
  3. Operating margins
  4. Quarterly revenue growth
  5. Quarterly earnings growth

Sustainability/Dividends/Forecasts

  1. Debt-to-equity ratio
  2. Interest cover
  3. Dividend payout ratio
  4. Forward yield
  5. Annual EPS growth forecast

Once we have analyzed the two companies based on the first two buckets, we can then assess whether they represent good value based on the current prices of the two stocks. We use the following criteria to assess valuations on a relative basis.

Valuation

  1. Forward price-to-earnings ratio
  2. Price-to-book value ratio
  3. Enterprise value-to-EBITDA
  4. Price to 3-year average free cash flow ratio
  5. 5-year price-to-earnings growth ratio

So, for example, a company that performs well compared to its rival on the first two buckets (business performance and sustainability/dividends/forecasts) and that is undervalued relative to its peer (based on the third bucket: valuation) could outperform its competitor going forward.

The table below provides the data that we will use to analyze Chevron and Total (NYSE:TOT) for the first two buckets.

Stock

Chevron

Total

Business Performance

Return on equity

13.56%

13.14%

Return on assets

6.32%

6.62%

Operating margins

12.03%

10.65%

Quarterly rev. growth

-6.20%

-5.50%

Quarterly EPS growth

-25.79%

-10.43%

Sustainability/Dividends/Forecast

Debt-to-equity ratio

15.19%

46.23%

Interest cover

N/A

26.68

Dividend payout ratio

39.00%

34.00%

Forward dividend yield

3.20%

4.60%

Annual EPS growth forecast

5.00%

7.69%

As you can see, the scores for the two companies are broadly similar and, with exception of a small number of ratios, there is little to choose between Chevron and Total. For instance, Chevron and Total's return on equity, return on assets, and operating margins are broadly similar, while the two companies' quarterly revenue growth was similar, at -6.20% for Chevron and -5.50% for Total. However, where the two companies show a difference is in terms of their bottom line growth from last quarter, with Chevron's quarterly EPS falling by 27%, while Total's fell by less than half that amount at -10.43%. Clearly, both companies struggled with lower volumes and a lower crude oil price, with Total also suffering from sharply lower refining margins.

In terms of sustainability, both companies are conservatively financed and do not appear to be taking excessive balance sheet risk. In fact, Chevron has a positive net interest cost, while Total's interest cover of 26.68 means that even when interest rates do begin to rise, its net margins should not be hurt too much by higher interest costs.

Meanwhile, the two companies are again similar in terms of their dividend payout ratios. Here we feel that they both have the scope to increase dividends per share, so as to increase their dividend yields and make themselves even more attractive as income stocks. However, that said, yields of 3.20% and 4.60% are highly attractive, with Total offering a yield that is 44% higher than that of Chevron. In addition, Total edges out Chevron in terms of EPS growth forecasts, with the former having growth expectations of 7.69% next year and the latter being slightly behind on 5.00%.

Overall, while the scores were very similar, we feel that Total edged out Chevron due to its better growth rates and higher yield.

Valuation

Due to its slightly weaker performance in the first two buckets, it would be of little surprise for Chevron to trade at a slight discount to Total. Let's see if it does.

Stock

Chevron

Total

Valuation

Forward price-to-earnings ratio

11.54

9.81

Price-to-book ratio

1.65

1.51

EV/EBITDA

6.34

4.80

PEG

2.29

1.27

Price-to-free cash flow ratio

38.39

110.33

We're surprised to see that Chevron actually trades at a sizeable premium to Total. For example, its forward P/E ratio is 17.6% higher than that of its sector peer, while its price-to-book ratio is 9.3% higher at 1.65 versus 1.51 for Total. Furthermore, Chevron's weaker growth rate means that its PEG is higher than Total's at 2.29 versus 1.27, while its EV/EBITDA ratio is 6.34 versus 4.80 for Total. Indeed, the only valuation metric in which Chevron looks good value compared to Total is in terms of price-to-free cash flow, and that is skewed in Chevron's favour due to a vast capital expenditure at Total.

Overall, we feel that Chevron's current valuation is too high versus Total's, and that it could narrow going forward.

Conclusion

Chevron is a high-quality company that posted impressive scores on the Team Money Research Rating System. Indeed, its scores were broadly similar to those of sector peer Total, although we feel that Chevron was edged into second place. However, the premium on which Chevron trades compared to Total appears unjustified and, as such, we believe that it could underperform its sector peer going forward.

Feedback Request: Which stocks do you want to see go head-to-head against Chevron in future articles? Please comment below!

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