Buy-rated Chevron (NYSE:CVX) offers unlevered appreciation potential of 39% to a McDep Ratio of 1.0 where stock price would equal Net Present Value (NPV) of $154 a share. We raise NPV from $146 on the gain in cash flow margin in recent years as a result of efficient operations and a high concentration on more profitable oil production. In his diplomatic fashion, Chief Executive John Watson at Chevron’s analyst meeting last month thought it was interesting that energy sector earnings growth, twice the market average for the past fifteen years, has not translated into leading P/E multiples. Taking exception to the view that investors should not pay for commodity price appreciation, Mr. Watson believes there is real value for shareholders in price gains in a resource business where demand is growing and supplies are challenging to develop.
Concurring with the CVX CEO, we see Chevron as our favorite large cap U.S. producer for investors seeking oil emphasis and low McDep Ratio. Meanwhile, the oil price trend continues up with the latest quote for the next six years at $110 a barrel compared to the 40-week average of $91. Other characteristics of Chevron that stand out in an industry context include miniscule debt at 0.06 times present value. Also, low unlevered cash flow multiple (EV/Ebitda) suggests CVX can generate cash equal to its whole stock market value and debt in just 4.1 years . Finally, Chevron has been a solid oil performer at least since its spinoff from the Standard Oil Trust in 1911 and as the original discoverer of the oil in Saudi Arabia in 1938.
Originally published on April 5, 2011