Chevron: On The Up And Up?

| About: Chevron Corporation (CVX)

Summary

In my view, Chevron is an excellent candidate for a diversified, large-cap dividend stock portfolio, and now is the right time to consider investing in its stock.

As I see it, the dividend payment currently yielding 4.51% is sustainable.

Chevron is more oil weighted in its revenue stream than its major competitors.

As such, in my view, it is poised to achieve higher price appreciation when oil prices recover.

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In my previous article about Chevron Corporation(NYSE:CVX) from February 26, I argued that Chevron was poised to achieve higher price appreciation when oil prices recover than other supermajor oil & gas companies due to its bigger historical upstream contribution. Meanwhile, crude oil prices have risen about 11% since my article was written, and the prices of all five supermajors have increased since then. However, CVX's stock has shown the greatest price appreciation among the five supermajors at 11.2%, while the average increase of the five companies was at 4.3%, as shown in the tables below.

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Since the beginning of the year, CVX's stock is up 5.4%, while the S&P 500 Index has increased 1.1%, and the Nasdaq Composite Index has lost 1.7%. However, since the beginning of 2012, CVX's stock has lost 10.9%, in this period, the S&P 500 Index has increased 64.3%, and the Nasdaq Composite Index has risen 88.9%.

CVX Daily Chart

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CVX Weekly Chart

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Charts: TradeStation Group, Inc.

On March 8, Chevron hosted its annual security analyst meeting in New York where executives reiterated priorities, expressed confidence in the company's near-term outlook and emphasized an advantaged position when markets rebound. In the meeting, John Watson, Chevron Chairman and CEO, said that Chevron would cut its capex in 2017 and 2018 by another 36%, bringing annual spending down to between $17 billion and $22 billion. That is down from an October 2015 estimate when Chevron said that it expected to spend $20 billion to $24 billion each year in 2017 and 2018. It is also sharply lower than the $26.6 billion Chevron is spending this year, which itself is a 25% reduction from last year's levels. According to Mr. Watson, the company is completing major projects that have been under construction for several years. This enables it to grow production and reduce spending at the same time, which should improve its net cash flow significantly. Watson reiterated the importance of dividend growth and maintaining a strong balance sheet in the company's financial priorities, noting the company's record of 28 consecutive years of dividend increases, and plans to limit debt increases beyond 2016.

Dividend

While waiting for a significant rebound in the price of oil, investors can enjoy the generous dividend, currently yielding 4.51% a year. The company has been paying dividends since 1970, and it has a long record of 28 years of continued raising its dividend. The annual rate of dividend growth over the past three years was at 6.8%, over the past five years was at 8.5%, and over the last 10 years was at 9.4%. Even during the global economic crisis of the years 2008-2009, the company continued to raise its dividend. As such, it is hard to believe that Chevron would break that many years of tradition. What's more, the company's recent steps to reduce capital expenses and the fact that CEO Watson reiterated the importance of dividend growth and maintaining a strong balance sheet leads me to believe that the dividend payment is sustainable.

CVX Dividend Chart

CVX Dividend data by YCharts

LNG

On March 07, Chevron announced that it has started producing liquefied natural gas [LNG] and condensate at the Gorgon Project on Barrow Island off the northwest coast of Western Australia. CEO Watson said:

We expect legacy assets such as Gorgon will drive long-term growth and create shareholder value for decades to come. The long-term fundamentals for LNG are attractive, particularly in the Asia-Pacific region, and this is a significant milestone for all involved.

The first LNG cargo was shipped to Japan on March 20. However, the company announced this week that it temporarily shut down the terminal due to technical difficulties, less than one month after its first shipment. According to Chevron, the export terminal is expected to resume production within 30 to 60 days after the facility halted output due to mechanical problems. Chevron's $54 billion project began producing LNG for export on March 7 but has since had trouble with a cooling unit, preventing the plant from turning natural gas into a superchilled liquid to be shipped on tankers.

LNG prices have crashed in the past two years, as shown in the chart below.

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Source: Chevron Corporation's 2016 Security Analyst Meeting

However, much of the capacity has long-term contracts signed already, which provides some protection against the downturn.

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Source: Chevron Corporation's 2016 Security Analyst Meeting

According to the research and consultancy company Wood Mackenzie, LNG demand is expected to grow significantly by 2025, to about 420 million tons per annum while supply is expected to reach about 370 million tons per annum. That will give Chevron's Gorgon Project significant LNG supply opportunity.

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Source: Chevron Corporation's 2016 Security Analyst Meeting

Upstream

Consistent with lower oil prices, Chevron and competitor upstream earnings per barrel declined in 2015. The company remains in the band of its competitors but no longer leads. This is because it is more oil weighted in its revenue stream than its major competitors, at greater than 75%. As such, in my view, Chevron is poised to achieve higher price appreciation when oil prices recover than its major competitors. In 2015 Chevron achieved a reserve replacement ratio of 107%, putting its five-year ratio at 113%. Last year it saw significant increases from its shale and tight assets based upon strong well performance and additional geologic data. The majority of these came from its Permian assets.

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Source: Chevron Corporation's 2016 Security Analyst Meeting

Chevron has achieved impressive exploration performance with 62% success rate in 2015. According to the energy research company Wood Mackenzie, Chevron's discovery costs in the years 2005-2014 had been about $1.8 per barrel, significantly lower than the costs of its principal competitors.

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Source: Chevron Corporation's 2016 Security Analyst Meeting

Summary

In my view, Chevron is an excellent candidate for a diversified, large-cap dividend stock portfolio, and now is the right time to consider investing in its stock. The company has been paying dividends since 1970, and it has a long record of 28 years of continued raising its dividend. What's more, the company's recent steps to reduce capital expenses and the fact that CEO Watson reiterated the importance of dividend growth and maintaining a strong balance sheet leads me to believe that the dividend payment, currently yielding 4.51%, is sustainable. Chevron is more oil weighted in its revenue stream than its major competitors. As such, in my view, it is poised to achieve higher price appreciation when oil prices recover.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.