Has Chevron's Time To Outperform Come (Again)?

Apr.10.12 | About: Chevron Corporation (CVX)

A comparison of the one year stock returns of the major integrated oil companies show the five global energy stocks bunched close together. A look at production and finance numbers indicates that Chevron (NYSE:CVX) deserves to be viewed as a premium member of the group. Over longer, multi-year time frames, Chevron shares have outperformed the other major energy companies. Maybe it is time for Chevron to outperform again.

In the U.S., the other major integrated oil companies are Exxon-Mobil (NYSE:XOM), with a market capitalization of $400 billion and ConocoPhillips (NYSE:COP), currently worth $96 billion. The international competitors are BP (NYSE:BP) of the United Kingdom, valued at $137 billion, Royal Dutch Shell (NYSE:RDS.A) (RDS.B) of the Netherlands, worth $218 billion, and French oil company Total S.A. (NYSE:TOT), with a market cap of $112 billion. The current Chevron market value is $207 billion. These large, integrated oil companies drill for oil and gas all over the world, process the energy in their own refineries and sell the refined energy products through distributors, their own gas stations and directly to end users.

For 2011, Chevron produced an outstanding year financially. Total net income was $26.9 billion, up 42% from 19 billion. Operating cash flow for the year totaled $41 billion with $29 billion of that spent on capital expenditures and exploration. Net income per share was $13.44 up from $9.53. The company increased the dividend twice during the year, increasing the payout by a total of 12.5% over the course of the year. Share repurchase spending for the year totaled $4.25 billion. Energy companies divide their operations into upstream, which is the exploration and production of crude oil and natural gas, and downstream, which is refining the energy and the resulting sales of the refined products - fuels, lubricants and chemicals. In 2011, 86% of Chevron's net income came from the upstream side of the company's business.

When compared to its competitors, Chevron runs one of the most efficient production operations. On the upstream side, Chevron generated a net cash margin of $38.90 per barrel of oil equivalent - BOE- in 2011. In comparison, Exxon-Mobil earned $25.70 per BOE and ConocoPhillips had a cash margin of $27.60. Over the last four years, Chevron has increased operating cash flow by 39%. Over the same period, operating cash flow for Exxon-Mobil declined by 7% and cash flow dropped at ConocoPhillips by 13%. The stronger performance by Chevron can be attributed to better efficiency as indicated by the net cash earned per barrel data. Chevron literature states efficiency gains equaled production of 100,000 BOE per day.

The tremendous results posted by Chevron in 2011 were primarily due to higher energy prices. The prices Chevron earned on oil in 2011 were about $30 per barrel higher in 2011 than for 2010. Actual production for 2011 dropped by 3% to 2,673 thousand BOE per day. Chevron management forecasts just 1% annual production growth through 2014, then expects production to ramp up to 4 to 5% per year in the second half of the decade.

With the price of oil remaining in the $100 or above range in 2012, Chevron will still generate large amounts of cash, but not much growth. High gasoline and diesel fuel prices in the U.S. will help the upstream results. However, 2012 is expected to remain flat in financial terms compared to 2011. The Wall Street consensus earnings forecast for this year is $13.10 per share, a slight drop from 2011.

Predicting earnings for energy companies is always more of a guess than a firm estimate. Actual results will be dependent on energy prices throughout the year. Higher crude prices will help the bottom line and lower oil prices would hurt. Of Chevron's total energy production, 80% is valued on crude oil prices and the remaining 20% is natural gas based.

Of the major oil companies, Chevron is currently the best managed to produce cash flow from the money it spends to find and produce oil and gas. With a year of running with the pack, share price wise, Chevron is poised to out perform the other large energy company stocks. Whether that out performance means greater share price appreciation or a smaller level of price decline depends on the price of oil in 2012.

As a longer term investment, Chevron should reward investors with both a growing share price and an increasing dividend stream. The historic, five-year annualized return for Chevron stock is 11% per year, with about one-third of that return coming from dividends. The next best major energy company is Royal Dutch Shell, which has returned 6% annually to shareholders over the five year period.

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