Chevron Will Soar Higher On New Technology, Deals

Apr.18.12 | About: Chevron Corporation (CVX)

Chevron (CVX), the fifth-largest integrated oil company in the world and the second-largest in the U.S., scored a victory recently after a judge denied an injunction seeking to bar the company from operating in Brazil after two offshore oil leaks, including a November spill of roughly 3,000 barrels northeast of Rio de Janeiro. The judge ruled that granting the injunction would be a judicial intrusion into the public administration as Brazil's oil industry is regulated by the ANP. The lawsuit, which also names Transocean (RIG), was brought by federal prosecutor Eduardo Santos de Oliveira. He is also in the process of filing two $11 billion (20 billion real) civil lawsuits against the companies, as well as a variety of criminal charges against 17 Chevron and Transocean employees. The criminal charges carry sentences of up to 31 years.

Chevron's issues in Brazil do not seem to be hurting the company overall. Chevron recently released a bullish first-quarter 2012 interim update. It is expecting its first-quarter earnings to be higher than the previous quarter, driven largely by its exploration and production arm, crude oil prices and lower operating expenses. Chevron's quarterly results will be released April 27, 2012.

The company has also been able to secure a variety of profitable agreements. On April 17, the company announced a preliminary agreement with Japan's Chubu Electric Power Co. to supply the latter with 1 million tonnes per year of liquid natural gas (LNG) over the next 20 years. Chevron has plans under way in South Korea as well, a solid strategic play that will drain excess crude from its European operations and funnel it to South Korea where the demand is strong. Its most recent shipment was announced April 16 and marked the second time in as many weeks that such a cargo was moved.

Chevron also has a promising pilot technology undergoing testing called "steamflooding." This process is being tested in Wafra, a field in the neutral area between Saudi Arabia and Kuwait, and involves injecting steam into the reservoir that heats the crude enough to make it less viscous. This way, the crude can flow into the well. If successful, the Wafta project will mark the first time that steamflooding has been used commercially in this type of reservoir.

Moreover, while Chevron is currently second in the U.S. markets, there is reason to believe that the company may rise up to take the crown from Exxon Mobil (XOM). Chevron's total shareholder return over the last 10 years, including dividends, is 237% vs. Exxon's 153%. Chevron is also in a stronger pricing position.

The company is trading at roughly $103 right now on a mean one-year target estimate of $125 a share. In addition to the estimated 21% upside, Chevron also pays a $3.24 dividend (3.20% yield), making for a predicted one-year return of almost 25%. To its credit, Chevron is also valued at a discount to its peers. The company has a forward P/E ratio of 7.68, compared to its peers' average of 11.41.

Competitor Exxon Mobil recently traded at just under $86 a share. The company has a mean one-year target estimate of $93.69 and pays a $1.88 dividend (2.30% yield), making for a total one-year predicted upside of roughly 13%. At this price, Exxon is priced at 9.52 times its future earnings. While these numbers trail its industry as a whole, they are higher than the companies we are comparing here, suggesting that while Exxon may not be overpriced it is priced somewhat higher than Chevron. As such, its numbers are somewhat weaker than its rival Chevron, which leads me to recommend Chevron over Exxon.

Rival ConocoPhillips (COP) recently traded at $74 a share on an $81.36 mean one-year target estimate. In addition to the predicted upside of almost 10%, the company also pays a $2.64 dividend (3.60% yield). Looking at ConocoPhillips' valuation relative to its peers, the company is trading at a discount. At its current trade price, the company's forward price-to-earnings ratio is just 7.98. All in all, while ConocoPhillips does not necessarily seem like the bad buy, and its upcoming division seems like a strong move to focus its operations, I have to recommend Chevron instead. Chevron seems much more stable, financially secure, and appears to have a bright and profitable future ahead.

Chevron competitor BP (BP) recently traded at $43 a share on a mean one-year target estimate of $54 a share. This upside combined with the company's $1.92 dividend (4.60% yield) makes for an estimated return of over 30%. For as low as Chevron is priced relative to its peers, for the most part BP is priced even lower. At its current trade price, BP has a forward price-to-earnings ratio of just 6.26; however, just because it's priced better does not mean that BP is necessarily the better choice. When the numbers look too good to be true, they usually are -- and I just don't think BP has what it takes to meet those figures.

Rival Schlumberger (SLB) recently traded at $69 a share on a mean one-year target estimate of almost $90 a share. In addition to the high predicted upside, it also pays a $1.10 dividend (1.60% yield), making for an estimated one-year return of roughly 32%. However, Schlumberger is also priced higher. The company's forward P/E ratio is 12.54. At these rates, Schlumberger is not only priced higher than the companies we are considering here, but it is priced on par or above its industry's average. Given its comparatively higher pricing and lower dividend yield, I recommend Chevron over Schlumberger.

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