Chevron: Attractively Valued Amidst Gorgon Project's Long-Term Potential

Jul.29.12 | About: Chevron Corporation (CVX)
  • Shares of Chevron (CVX) rose 0.9% on Friday after the major independent oil and gas company reported its second quarter results.

Second Quarter Results

Chevron reported second quarter earnings of $7.2 billion, or $3.66 per diluted share. This compares to earnings of $7.7 billion, or $3.85 per share in the second quarter of 2011. Earnings came in well ahead of analysts expectations of $3.24 per share. Revenues came in at $60 billion which compares to $67 billion a year ago. On average, analysts were looking for the company to report $68.5 billion in revenues.

The company continues to divest non-core assets at its downstream business, while working on new growth investments. Divestures boosted the company's cash balances to $21 billion as the company builds a buffer to deal with volatile crude prices and cost overruns at its $37 billion Gorgon natural gas project in Australia.

The company cut its second quarter capital expenditures budget from $8.3 billion to $7.8 billion. Some $7.0 billion of those investments were channeled towards its upstream business, of which $5.2 billion for the international activities.

CEO and Chairman John Watson commented:

Our second quarter earnings and cash flow were among our strongest ever, even with softer oil markets. Despite current weakness in the global economy, we continue to invest in our long-term growth projects to help deliver affordable energy to meet future demand.

Segmental Information

Upstream

The upstream division of Chevron reported a 18% decline in quarterly profits to $5.62 billion. Worldwide oil-equivalent production fell 3% on the year to 2.62 million barrels as a result of asset dispositions, higher maintenance levels and the shut down of the Brazilian Frade Field.

US upstream operations earned $1.32 billion compared to last year's $1.95 billion as a result of lower production, lower prices and absence of gains on asset sales. Average oil prices fell from $104 per barrel to $97 this year, while natural gas prices halved to $2.17 per thousand cubic feet. Oil-equivalent production fell 5% to 659,000 barrels per day.

International upstream activities generated $4.30 billion in profits, down from last year's $4.92 billion. The profit decline was modest in comparison with its US operations as international gas prices actually increased to $6.10 per thousand cubic feet. Oil-equivalent production fell 1.7% to 1.95 million barrels per day.

Downstream

Profitability at the downstream division improved a lot compared to last year. Net profits came in at $1.88 billion, an 80% improvement compared to last year.

US downstream operations earned $802 million compared to $564 million last year. Refinery production increased by 53,000 barrels per day to 928,000 barrels while refining margins improved. International downstream profits more than doubled to $1.08 billion. Profits were driven by a $200 million gain on the asset sale of GS Caltex's power operations in South Korea. Refinery input declined by 147,000 barrels per day to 870,000 barrels per day as a result of the sale of the Pembroke Refinery in the UK.

Valuation

Chevron ended its second quarter with roughly $21.5 billion in cash, equivalents and marketable securities. It operated with $10.2 billion in short and long term debt for a net cash position of $11.3 billion. The company generated $123.3 billion in revenues for the first six months of 2012, on which it net earned $13.3 billion. Diluted earnings per share came in at $6.93. At this rate the company is on track to generate annual revenues around $250 billion on which the company is expected to earn around $14 per share. Based on Friday's market valuation of $215 billion, the market values the firms operating assets around $204 billion.

This values Chevron at around 0.8 times annual revenues and 7-8 times annual earnings. This valuation compares to a revenue multiple of 0.8 times for Exxon Mobil (XOM) and 0.4 times for BP Plc (BP). Both competitors trade at 10 and 5 times earnings, respectively.

Currently Chevron pays a quarterly dividend of $0.90 per share, for an annual dividend yield of 3.3%.

Investment Thesis

Shares of Chevron trade flat so far in 2012, moving within a $90-$105 trading range. Shares returned approximately 140% over the last decade, which excludes the rich annual dividend yield, currently running at over 3%.

The company continues to trade near its all time highs around $110 per share and can set new highs in the coming years. This is despite a setback in crude prices and natural gas prices in recent months. With its mammoth Gorgon project still expected to come online by the end of 2014, the growth profile for the coming decade is secured. The massive project will provide a huge boost to the company's upstream business, while the downstream business continues to outperform most of its competitors.

For long term investors looking to earn a decent yield, Chevron is a great long term addition to an investors portfolio.

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