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With long-term demand pressures from emerging markets and a recovering worldwide economy, investment in energy equities is an excellent short-term opportunity. Chevron (CVX) is the smallest of the supermajors in this field (a result of a 2001 merger between Texaco and Chevron). With a vertically integrated approach from production to retail marketing, Chevron's key market is and has been the North American oil market. As with other energy companies, Chevron has short-term potential for production growth and strong cash flow, a perfect complement to a global shoring of demand.

I argue here for a buy recommendation on Chevron. The upside on Chevron, I believe, is around 30%, giving it the largest valuation potential among the supermajors. With its unique resource base and strong fundamentals, Chevron makes for a great investment. Additionally, with its recent moves in the Wheatstone and Gorgon LNG projects, Chevron will be making good on supplying gas, an initial gamble that has turned out to be for the best given the increased tapping of gas reserves.

Valuation

Chevron is strongly undervalued. Unlike BP (BP), Chevron has no impending legal anxieties and unlike Exxon Mobil, Chevron has a much higher earnings potential. Chevron's market capitalization is around $200 billion and it maintains a competitive forward P/E of 8.0. A reasonable consensus view puts a 12-month target price for Chevron at about $130. The long-term yield on Chevron stands to be around 3%, a figure largely contingent on global oil prices. Short-term crude prices are expected to increase, with a resurging global economy. Commodity prices, however, are fundamentally out of the control of the company that sells them. Once supply reaches demand levels (the lag of oil supply behind demand is generally quite pronounced), I expect an overall flattening in Chevron's share price.

Growth Potential

Chevron has expanded its production potential with the new Gorgon and Wheatstone liquefied natural gas projects in Australia, which are expected to boost is natural gas production by about 10% over the next decade. Its LNG projects further position Chevron to increase it gas holdings. Indeed, a primary strategy of management is to build a leading position in the emerging gas supply chain in the Asia-Pacific markets. Chevron's cash margin per barrel is at least $7 higher per barrel than the nearest competitor. Chevron is quite heavily oil-oriented, and its high levels of exposure in this market pose a potential risk in the event of economic demand decreases or geopolitical unrest. Since Chevron is heavily reliant on its oil production, its allocation for research must be high and the number of deep sea drilling attempts must also be frequent, and often risky. That said, Chevron is well-leveraged among its peers regarding crude prices. This is, no doubt, in part due to its 50% success rate in drilling exploration in the past. Chevron intends to spend $3 billion in exploration in 2012.

Chevron, through the Atlas Energy deal of 2010, has an industry-leading stake in the Marcellus shale, in addition to solid holdings on the Wolfcamp and Utica shales. The increased output at these sites is evidence that Chevron is diversifying beyond its presently "oily" holdings.

Chevron has drilling operations in the U.S. and Canada. However, its unconventional production distribution -- among countries such as Poland, Romania, and Bulgaria -- gives Chevron an interesting edge. Though Chevron has a recent history of mergers and acquisitions, it seems to be focusing on organic, internal development of various interests and projects.

Risks

As ever, regulatory scrutiny serves as a check to oil and gas producers. Chevron has stakes in many countries associated with geopolitical unrest, a quality not uncommon among its peers. Particularly, interests in Ecuador have led to a recent lawsuit, which the company has considered a "fraud" in a late 2011 conference call. There are some recent reports suggesting that Chevron has misled its investors regarding this litigation and potential, which Ecuadorian courts have set at $18 billion. Additionally, Chevron claims not to be under the jurisdiction of the court in Ecuador, though it is demonstrably not the case. Despite this, a near-term settlement of the matter is unlikely, thus making this risk more of a concern for those looking to initiate a long-term hold position. Despite this, Chevron's overall exposure in such unstable areas is mitigated by its overall diverse set of projects.

My analysis assumes a decent overall economic outlook and an overall stable eurozone -- a major source of demand to boost oil prices. The management at Chevron must also actualize its production quotas for the desired profit margins.

Conclusion

Chevron recently indicated to analysts that its first-quarter profits have increased from the fourth-quarter report. Rising oil prices, wider refining margins, and the selling of fuel-marketing assets in Spain are propelling Chevron through the second quarter of 2012. On April 17, Chevron shares superseded their 200-day moving average, currently trading up about 1.7% per day. The impending breakout of Chevron's stock makes the time arch of this investment decision, in my opinion, quite short. I would recommend initiating a position by the end of the second quarter of 2012.

Of its peer integrated oil and gas providers, Chevron is uniquely discounted in the near term, largely due to its high ratio of liquids:gas production weight of 70:30. This will allow Chevron to capitalize short term. Within its commodities sector, Chevron is a competitor and an excellent blue-chip stock to buy at present. Additionally, the company tends to register a quarterly dividend around $0.81. However, the five-year growth rate of Chevron is not as competitive as that of Exxon Mobil (XOM), which benefits from an impressive shore of capital and international interests. Additionally, Exxon Mobil is poised for a substantial dividend hike in the near future. In any scenario, a five-year investment with Exxon Mobil is likely to be a better option. Despite this, Chevron stands to make a run in the following year to a price of about $130, yielding better short-term earnings than its supermajor brethren.

Source: Chevron's New Gorgon Project Will Push Stock Higher