While still a mammoth of a company, Chevron (CVX) makes decisions like a small entrepreneurial startup. The company has been in exploration and production of biofuels, natural gas, coal mining, oil, and geothermal energy and in business for over 133 years, but still shows that spry, youthful eagerness of a new challenger.
Playing in the same ball field as Royal Dutch Shell (RDS.A), Anadarko Petroleum (APC), BP (BP), and Valero Energy (VLO), the company is in second place behind Exxon Mobil (XOM), but gaining traction and speed. Chevron's aggressive plays in natural gas and liquid exploration are helping the company move up the charts. While still seeking to give the best returns for investors, I see the company as taking risks that others are not willing to take, and is just one reason why I'm convinced that Chevron is still a great buy today.
Just looking at how the company invests capital for exploration is a lesson on good management. Take natural gas for example. Although the price for natural gas is still relatively low, exploration of the gas is a smart move for a future rise in price. Chevron has been picking up the pace of natural gas exploration around the world. At the Chevron-operated Wheatstone natural gas project in Australia, the company recently announced that its Australian subsidiaries have signed a non-binding Heads of Agreement with Tohoku Electric Power Company Incorporated for the delivery of liquefied natural gas [LNG]. According to the terms of the agreement, the group consisting of Chevron, Apache (APA), and Kuwait Foreign Petroleum Exploration Company (KUFPEC), will deliver up to 1 million tons per annum (MTPA) of LNG for up to 20 years to Tohoku. The joint venture for the onshore foundation project is between the Australian subsidiaries of Chevron (operator 72.14%), Apache (13%), KUFPEC (7%), Royal Dutch Shell (6.4%), and Kyushu Electric (1.46%).
Another example of still going after natural gas is that both Chevron and Royal Dutch Shell could be named by Ukraine as the winners of a bid to explore two vast fields for shale gas exploration, beating out Exxon Mobil. The winners for the multi-billion dollar projects are expected to be named soon. If awarded to Chevron and Royal Dutch, this will be good news for Chevron investors because Ukraine sits along one of the main transport routes for natural gas from Russia to Europe. Finally, the European Commission approved the proposed acquisition of the Angolan company Angola LNG by BP Plc , Chevron, Eni SpA, Sociedade Nacional de Combustiveis de Angola (Sonangol) of Angola and Total SA (TOT) to produce liquefied natural gas in Angola and sell it to customers around the world for re-gasification.
Bringing crude oil to surface from places like the bountiful Gulf of Mexico is a risky business as recent disasters have proven. Chevron knows this and has been working on implementing new, safer and more efficient technology for drilling in the seas. The company recently announced that it has signed a five-year contract with a subsidiary of Pacific Drilling S.A to begin using a deepwater drillship known as the Pacific Santa Ana, the first drillship designed with the capacity to perform dual gradient drilling [DGD]. The biggest difference is that where conventional deepwater drilling uses a single drilling fluid weight in the borehole, DGD incorporates two weights of drilling fluid, with one above the seabed and the other below.
This new technology effectively eliminates water depth as a consideration in well design and allows drillers to closely match the pressures presented by nature. DGD also allows drillers to more quickly detect and appropriately react to down-hole pressure changes, enhancing the safety and efficiency of deepwater drilling operations. Equipped with three mud pumps for drilling fluid and three for seawater, a DGD riser, and a mud lift pump handling system, this new ship reduces drilling risks by increasing safety while providing much more drilling efficiency than conventional drilling ships. This is just another example of Chevron looking for creative advantages for exploration.
Keeping a balance between natural gas and oil exploration has paid off for Chevron. While others like Exxon Mobil dove into the natural gas hype a few years ago, Chevron kept drilling for oil, which makes up two-thirds of its holdings, keeping a nice balance between the two resources. In 2010, Exxon Mobil spent $35 billion buying up XTO Energy, making Exxon Mobil the America's largest natural gas producer, while Chevron paid only $4.3 billion for Atlas Energy. Experts agree that natural gas prices will come back to normal or above normal range in the next couple of years and that time, both companies will profit from reserves. However, Chevron will also be steps ahead in oil exploration and should do well from both energy sources.
The company is sitting pretty financially. As CEO John Watson said in a 2012 security analyst meeting:
And now, let's look at our financial results. Our advantaged portfolio plus strong operating performance delivered record earnings of $27 billion and a return on capital employed of 21.6%. We also had record cash flow from operations of $41 billion. We had two dividend increases in the year for a combined 12.5% increase in the quarterly rate and repurchased $4.25 billion in common in stock.
The company continues its positive progression.
For the first quarter of 2012, Chevron reported earnings of 3.27 per share, exceeding last year's first quarter results by 5.83%. The company had first quarter 2012 revenues of $60.71 billion, 1.20% above the prior year's 1st quarter results. For 2011, the company had revenues for the full year 2011 of $253.71 billion, 28.01% above the prior year's results. First quarter 2012 results reveal that net income rose 4.2% to $6.47 billion, or $3.27 a share, from $6.21 billion, or $3.09 a share, a year earlier. Sales rose 0.8% to $58.9 billion. Additionally, Chevron announced last month that the Board of Directors declared a quarterly dividend of $0.90 per share, representing an 11.1% increase in the company's quarterly dividend.
It is difficult to find a company that continually thinks like an underdog. Chevron is always searching, always creatively seeking energy resources. When a company stays hungry like this, it is always a sign of a true winner.