Chevron Is Overvalued At $100

May.16.12 | About: Chevron Corporation (CVX)

Chevron (NYSE:CVX) recently began drilling in Deepwater, Gulf of Mexico. Why is this important? For one thing, it is because it is using the Pacific Santa Ana. This is the first drill ship on the planet made for dual gradient drilling. This is a kind of drilling which could allow for safer deepwater drilling.

Chevron has a 60 month contract with the ship maker, Pacific Drilling S.A. This is the first drill-ship that was made to be able to handle the dual gradient drilling. Chevron is turning its focus to digging more in America for oil. The company thinks the Gulf presents a huge opportunity for more drilling, and it is focusing its efforts there.

Finally, the ship uses a revolutionary way of digging. It uses 2 weights of fluid (one on the seabed, the other beneath it). This is opposed to regular deepwater drilling, which uses just one drilling fluid weight in the borehole. This enables the driller to match the pressure to the depth of the water, which is very important in deep water. Basically, it makes the drilling a little safer and more efficient. If the experiment proves successful, this might help the company in the future. However, the major determinant in the success of this project is whether the company finds oil in the Gulf.

In other news, Chevron Thailand Exploration and Production (an exploration arm of Chevron) reached an agreement with Norwegian offshore driller SeaDrill Limited (NYSE:SDRL). The 5 year contract is worth $235. The contract starts in the first part of 2014. The contract begins with the delivery of the T15 and T16 rigs to the company by 2013. The rigs will be self erecting and available for operation by the fourth quarter of 2013. They are currently being built in China. However, the main part of the contract involves the delivery of the T18 rig. This $135 million rig will come with a drilling capacity of 20,000 feet, and is able to drill in up to 6,500 feet of water. The company reached the agreement with, SeaDrill Limited, is an offshore drilling firm that provides offshore drilling services to oil and gas industries worldwide. These rigs could prove very beneficial to future growth as well.


For the first quarter, the company reported earnings of $6.5 billion. This is slightly higher than the $6.2 billion it achieved in the first quarter of 2011. However, it is nearly $3 billion less than its main competitor, Exxon Mobil (NYSE:XOM). The total sales and operating revenue for the quarter were $59 billion, as opposed to $58 billion last year.

Chevron's stock price is $102.84. This is almost right between its 52 week low of $86.68 and high of $112.28. Its price earnings ratio is 13.62, and it has a price to sales ratio of .89. This is similar to its main competitor Exxon Mobil, which has a price to sales ratio of .86. However, it is significantly worse than Total (NYSE:TOT), which boasts a price to sales ratio .46.

The firm's profit margins are quite good, at 11.45%. This is almost double some of its main competitors like BP (NYSE:BP), Total and ConocoPhillips (NYSE:COP). Chevron has a market capitalization of $201 billion, and the enterprise value is roughly $192 billion (it does have $19.77 billion in cash on hand). This means it is very overvalued.

Chevron and Exxon Mobil both raised their dividends substantially this quarter. Chevron did so by 11% and Exxon Mobil by 21%. These were both substantially higher than what analysts thought, and more than Chevron's average dividend increase. The result was a $3.6 dividend for Chevron, or 3.5% of the total stock value. However, both these pale in comparison with Royal Dutch Shell (NYSE:RDS.A), BP and ConocoPhillips, which issued dividends of 5%, 4.9% 4.9% respectively.

These high dividends were all the result of the high oil prices, and the firm's belief that they would continue. The Chief Executive John Watson stated that the hike showed the company's confidence in its future growth prospects. However, the estimates reveal that Chevron would need the intermediate oil price in west Texas to go to $81 in order to get a sufficient amount of cash to cover the dividend hike. Time will tell whether this was a wise move.

Overall, I would not recommend this company's stock, even though it does have good profit margins and low debt levels. The problem is that the market capitalization is roughly $9 billion above the enterprise value, which means the firm is overvalued. Even though it is doing well financially and have decent future prospects, the overvalued stock price limits its' potential increase in the future.

There's no denying Chevron is making progress in its drilling endeavors. However, I would still hesitate to recommend it for a long term investment. It is overvalued based on its market capitalization and the enterprise value. This is a quality company with good long-term prospects, but the current stock price simply makes it an unwise investment. If you do invest in Chevron, you are very unlikely to see a 10% return or more. This is a low risk, low reward proposition.

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