Since the energy sector seems to be such a hot topic for investors, and particularly oil and gas companies, the one biggie I believe should be considered is Chevron (CVX). This giant is not a sleeping one, making great strides in oil exploration and sporting a market cap of over $200 billion. The company is involved in almost every component of energy, including natural gas, biofuels, coal mining, and geothermal energy, as well as insurance and real estate. These creative production steps, along with a few other good management decisions, are why Chevron is one of the colossal companies to buy and hold for kids and grandkids.
Chevron produces on a massive global scale from Angola (recently opened LNG facility), to Vietnam, including operations in North America, South America, Europe, Africa, the Middle East, Asia and Australia. Continuing its worldwide scope of energy operations, Chevron recently announced that it intends to invest $65 million in shale gas exploration in Romania.
In addition, the company is focusing on more deepwater exploration, which is not always a safe task. Companies like Exxon Mobil (XOM), BP (BP), and others have had their mishaps. Chevron too has faced lawsuits, with the most recent coming from the spill off the Brazilian coast last November where 3,000 barrels over eight days leaked out.
Though not mischievous or intentional on the part of Chevron, (Transocean (RIG) is the rig operator and Rio de Janeiro has kicked the company out of the state and fined it $28 million), the company accepted full responsibility admitting a miscalculation of pressures. Unfortunately, the political repercussion from the Brazilian government is hurting Chevron's reputation. Current lawsuits means Chevron faces up to $22 billion in potential legal charges. The company's management team is weighing whether to continue employing the services of Transocean for future offshore drilling.
But the company is taking action. At a recent Security Analyst Meeting, Chevron's CEO John Watson started the meeting with a special emphasis on safety. One of the slides in the presentation stated, "There is always time to do it right." While many leaders would probably do the same after so much press regarding safety violations and in the midst of a few lawsuits, Chevron's leadership team seems to be getting serious about doing things right.
Chevron is the fourth largest of the six mega oil companies, trailing Exxon, Royal Dutch Shell (RDS.B), and BP, though other competitors include regional and independent companies, Anadarko Petroleum (APC) and Valero Energy (VLO). Though mammoth in size and experienced in years, Chevron is poised to reach 20% production growth by 2017, with the highest production coming from LNG projects in Australia, deep water explorations, and production from its eight million acres of diverse shales.
This is one of the great things about this company; it expects and gets great returns. The company's lofty goals to increase its oil and gas production by approximately 22% by 2017, to 3.3 million barrels of oil equivalent per day from its current rate of 2.7 MMBOE, will help to boost its reserves. The company added enough reserves last year (about 1.67 billion barrels) to replace 171% of the oil and gas the company pumped.
Chevron's current financials are looking good too, providing sweet returns for stockholders. The company's total debt/equity ratio is around 8%. The company has approximately 10% worth of its market capitalization worth of cash equivalents on hand. Although fairly weak cash flow, compared to net income ($14.5 billion in FCF vs. $27 billion in net income for 2011), the free cash flow still covers the dividend payout twice over in most years. Over the past five years, the company's earnings per share increased by 11.5%, and each Chevron share also comes with a cash and equivalent position of more than $10, with a yield of 3.02% and a modest payout ratio of 22.9%,.
Chevron is trading at a discount to its historical P/E. With a current P/E of 7.8, it is trading below its 5-year average of 9.4, and has a forward P/E ratio of 8. In a press release last month, CEO John Watson said, "Financially, 2011 was a record year for Chevron. We generated the strongest earnings and cash flow in our company's history. Looking ahead, we are well positioned and committed to delivering consistently strong financial and operating performance. For 2012, we have a sharp focus on executing our major capital projects, which underpin 20% volume growth over the next six years."
Chevron's management expects to see an annualized growth in production of a single percentage point until year 2014. After that, growth is expected to climb up approximately 5% per annum. This is possible with new locations and processes coming on line such as Wheatstone and Gorgon, the two liquefied natural gas projects off Australia's shores, to be up and running 2015, and expected to do well as demand increases in the Asian markets. Also, Chevron's production at the LNG facility off the West African coast of Angola is expected to peak at 175,000 BOE/D. The company's entire portfolio of LNG production is expected to be ramped up by 460,000 BOE/D, making up 77% of the entire production growth that is expected.
This is a company that has always been for the long haul investor. In addition to always seeking out new locations for energy resources, the company is a leader in the research on alternative resources. Chevron is one of those mainstays that just keeps on growing - and giving. The company currently pays out a 2.9% dividend yield. Combined with an attractive growth plan, it is difficult to avoid this giant.