Seeking Alpha
Profile| Send Message|
( followers)  

Industry Overview

Oil and gas are among the most widely demanded commodities for energy consumption worldwide. The Oil and Gas Industry is distributed between two major sectors, namely Upstream (Exploration and Production) and Downstream (Refining and Marketing).

The Upstream segment is primarily involved in the exploration of new oil and gas reservoirs and production from existing and new reservoirs. The earnings for this sector are closely aligned with the prices of crude oil.

The Downstream segment is involved in the refining of oil, and marketing and distributing oil and natural gas to different consumers; the major cost component is crude oil.

To get a better understanding of the Oil and Gas Industry, review our previous article.

Company Overview

Chevron Corporation (NYSE:CVX) is a fully integrated oil and gas company with operations in various countries, including the U.S., and is one of the largest energy companies in the world.

The company has Upstream, Midstream, Downstream and Others as its different business segments.

The majority of CVX's crude oil production is priced using the Brent as a benchmark.

Correlation of Stock Price with Oil Prices

The company drives approximately 95% of its earnings through the Upstream business segment, and is linked significantly with crude oil prices.

The following graph shows the relation between oil prices and the stock price


(Click to enlarge)

Financial Performance

The company has witnessed an increase of 3.2% in the Upstream earning for 1Q2012 as compared to the previous year.

The U.S. Upstream business witnessed an increase of 5.5% in 1Q2012 YoY. However, the higher oil realizations were offset by the lower natural gas prices and production decline in oil production, due to the asset sale of Cook Inlet, Alaska, and normal field depletion.

The U.S. Upstream average sales price per barrel, of crude oil and natural gas, was $102 in 1Q2012, up 15% as compared to $89 a year ago. The average sales price of natural gas, which stood at $2.48 per thousand cubic feet, was down 39% for 1Q2012 as compared with $4.04 for 1Q2011.

The International Upstream business witnessed an increase of 2.5% in 1Q2012 YoY. However, the higher oil realizations were offset by higher exploration expenses, lower volumes, higher operating and tax expenses, and lower production due to maintenance-related downtime and normal field declines.

The average sales price for crude oil and natural gas liquids in 1Q2012 was $110 per barrel, up 16% compared to $95 in 1Q2011. The average price of natural gas was $5.88 per thousand cubic feet, up 17% compared with $5.03 for the same period last year.

1Q2012

1Q2011

% change

Upstream

United States

1,529

1,449

5.5%

International

4,642

4,528

2.5%

Total Upstream

6,171

5,977

3.2%

Downstream

United States

459

442

3.8%

International

345

180

91.7%

Total downstream

804

622

29.3%

All Others

(504)

(388)

29.9%

Total

6,471

6,211

4.2%

Source: 10Q

U.S. Downstream operations earned $459 million in 1Q2012, up 3.8% compared with earnings of $442 million from a year earlier. Refined product sales decreased by 41,000 barrels per day in 1Q2012, compared to the same period last year, mainly due to lower residual fuel oil and gasoline sales.

International Downstream operations earned $345 million in 1Q2012, up 92% compared with $180 million in 1Q2011. The earnings increased due to gains on asset sales of about $200 million, primarily showing the sale of the company's fuels and finished lubricants' businesses in Spain.

Cash flow and CAPEX

1Q2012

1Q2011

% change

Cash flow from operating activities

8,387

9,814

-15%

CAPEX

(5,895)

(4,645)

27%

Cash flow from Investing

(1,973)

(8,347)

-76%

Source: 10Q

The cash flow from operating activities decreased by 15% for 1Q2012, as compared to last year, due to increased working capital requirements. The company's CAPEX for 1Q2012 has increased 27% from the previous year. Cash flow from investing decreased 76% due to the sale of time deposit, and no acquisition or advance as witnessed in the same quarter last year.

Financial Performance Going Forward

As mentioned above, the company drives approximately 95% of its earnings through the Upstream segment. Oil prices have decreased by 22% and 23% for Brent and WTI since the beginning of 2Q2012 to date. Natural gas prices in the U.S. have shown recovery, and the Henry Hub spot prices are trading at $2.87/mmbtu, up 44%, since the beginning of 2Q2012 to date.

According to our estimates, a decrease of about 25% should reduce CVX's EPS by approximately 20%. Nevertheless, the strong recovery in U.S. gas prices should provide some support to the EPS.

Cash Margins

CVX enjoyed one of the highest cash margins as compared to its peers, namely ConocoPhillips (NYSE:COP), Exxon Mobil Corp. (NYSE:XOM), British Petroleum (NYSE:BP), Royal Dutch Shell plc (RDS-A) and Total SA (NYSE:TOT).


(Click to enlarge)

Source: Company presentation

Recent Developments

Below are some of the recent developments that may impact the company's future profitability:

  • Chevron Corp announced that its wholly-owned subsidiary, Chevron Global Energy Inc., has entered into an agreement with Kosmos Energy Ltd (NYSE:KOS), to explore blocks offshore Suriname.
  • According to reports, Chevron Corp has signed a deal with Tokyo Electric Power Co. (TEPCO), to supply additional liquefied natural gas (LNG), as well as an equity stake in the Wheatstone project in Australia.
  • The European Commission has approved the proposed acquisition of Angola LNG by CVX and other participants.
  • Plaintiffs from Ecuador have filed a second lawsuit, this time in Brazil, in an attempt to enforce an $18 billion court ruling against CVX, as ruled by a court in Ecuador, for pollution.
  • According to reports, CVX's Gulf production has been affected by Thunderstorm Debby, and it has vacated some of its workers.

Competitors

A few of CVX's important competitors include Exxon Mobil Corporation and Occidental Petroleum Corporation (NYSE:OXY).

Exxon Mobil Corp is trading at a P/E and P/B ratio of 9.6x and 2.5x, and offers a dividend yield of 2.8%. Its EPS has witnessed a decline of 6.5% in 1Q2012, and is expected to witness a decline of 2.50% for the year.

Occidental Petroleum Corporation is trading at a P/E and P/B ratio of 9.2 and 1.7, and offers a dividend yield of 2.7%. Its EPS has witnessed a decline of 2% in 1Q2012, and its profitability is expected decline 4.2% for the year.

Outlook

The stock has witnessed little decline in the previous three months, due to the strong dividend yield offered, which is among the highest in integrated oil and gas companies. It is trading at a P/E and P/B multiple of 7.8x and 1.6x, which is lower than its peers mentioned below.

We advise a cautious stance with regards to investment in the sector due to the high uncertainty in oil prices. However, for an investor wanting an exposure with high dividend yield in the E&P sector, we would advise to long CVX and short oil ETF (NYSEARCA:USO).

CVX

XOM

OXY

P/E

7.87

9.64

9.18

P/B

1.61

2.48

1.68

P/S

0.85

0.88

2.66

Dividend Yield

3.60%

2.80%

2.70%

Total Debt/Equity

7.34

9.54

42.6

EPS growth 1Q2012

3.50%

-6.50%

-2.00%

EPS growth expected 2012

-2.00%

-2.50%

-4.20%

3 month performance

-4%

-4%

-16%

YTD performance

-7%

-3%

-17%

52 Week Performance

1%

4%

-22%

Source: Hedge Chevron By Selling Oil ETF