Chevron: A Solid Long-Term Addition To Any Diversified Portfolio

Jan.30.12 | About: Chevron Corporation (CVX)

Shares of oil major Chevron Corp. (NYSE:CVX) closed down 2.5% on Friday after the company released a disappointing fourth-quarter earnings release.

Disappointing quarter
Fourth-quarter earnings came in at $5.1 billion or $2.58 per share, down 3% compared with last year and far below third-quarter earnings of $3.92 as downstream operations were losing money in the final quarter of the year. Earnings fell short of expectations as analyst were expecting earnings anywhere between $2.70 and $3.10 for the quarter. Full-year earnings grew to $26.9 billion, or $13.44 per share with revenue up to $244 billion.

Future growth
Chevron is investing heavily in future growth. In 2010 it merely invested $21 billion in capital expenditures. This has grown to $29 billion in 2011, and it expects to spend almost $33 billion in 2012. Large parts of these investments will be directed to "Gorgon," a massive natural gas project in Australia, in which Chevron holds a 50% stake. The massive field, which would contain the equivalent of almost 7 billion barrels of oil, will demand $37 billion in investments and start production by 2014.

Shareholder returns
Chevron indicates it will repurchase about $1.25 billion in shares for the first quarter. It also announced a 81cent quarterly dividend, equivalent to a 3.5% annual yield, which means that at this pace it returns about $12 billion to shareholders per annum. This comes down to a 6% yield for shareholders, which is a little less compared with competitors. Chevron does not want to lever up and maintains a net cash position of at least $10 billion to have the flexibility of making targeted acquisitions.

Long-term prospects
Despite trading just below its all-time highs, Chevron trades at a mere 7.5 times earnings and it yields 6% returns for shareholder per annum if we combine the share repurchases and dividends. On top of that it has good future growth prospects with Grongon going online in 2014. Any uncertainty caused about potential liabilities regarding the recent Brazilian oil spill and Ecuador court cases is overdone.

Chevron's stock bounced back from its all-time high around $110 already four times in 2011, and it will be merely a matter of time before it will make another attempt in anticipation of new records.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.