After hitting the Caribbean islands, Storm Isaac has moved westwards and may move northwards before hitting U.S. offshore oil patches. Weathermen have reported that the storm could turn into a hurricane, with gale force wind and heavy rains lashing wherever it finds its way across. This sounds like terrible news to oil and gas companies and most companies in the area have already shut down operations indefinitely, until the storm subsides. At this moment, there does not seem to be any let up in the intensity of the storm and most communities have already been evacuated. It is tempting to think that hurricanes and storms are not major issues to oil companies. With their advanced ships and infrastructure, it is easy to conclude that storms and hurricanes have no effect on oil and gas companies.
Contrary to this belief, high speed winds and thunderstorms can damage pipelines and interfere with GPS and navigation systems that oil companies rely upon. Any damage to such infrastructure while exploration or drilling is underway can put employees' lives at risk. Moreover, it can lead to significant risks of oil spills and fires, something that many companies like Chevron (CVX) and BP (BP) have experienced recently. Chevron was in news recently for the fire that struck its facility at Richmond, California. Chevron shut it down for a while, till the damages could be undone and operations can be restarted. The company also announced that it has begun to evacuate its workers from storm affected areas in the Gulf of Mexico in order to avoid untoward incidents.
Curiously, Chevron has not shut down its facilities in the Gulf and production is expected to continue as usual. It is not clear why the company has taken such a risk but I suspect Chevron does not want to waste time in making up for the loss of production as a result of the fire in Richmond, California. It might be a clever thing to do, but I would not want to mess with the forces of nature and wait for the hurricane to pass. Other companies like Exxon Mobil (XOM) and BP have not only asked their employees to leave but have also shut down their operations indefinitely.
By keeping the production running and by allowing the drilling machines and turbines to remain switched on, Chevron risks major damage to its infrastructure from the onslaught of the storm. It will all be over within a few days but those few hours are just enough to do damage to even the most sophisticated of instruments. By asking workers to leave and keeping the operations running, Chevron seems to be communicating to the world that it not only cares about its employees but it also cares about production not being affected. The company is behaving exactly the way a huge oil enterprise must behave, by taking risks and ensuring the safety of its employees.
Of course, there are always chances that the hurricane might do a lot of damage to Chevron's facilities but so far, everything seems to be working its way. We must remember that BP was in an embarrassing position after the major oil leak in the Gulf of Mexico. It was asked to pay millions of dollars in compensation to victims and a few of them even tricked the company into paying them, when they were not victims at all. Anadarko's (APC) history is spotless but I guess the company wants to make sure that there are no untoward events during the hurricane. Anadarko has shut down its facilities in the Gulf of Mexico as well.
On the 27th of July, Chevron reported its second quarter earnings, which was lower than its earnings in the second quarter of 2011. With a net income of $7.2 billion, there was a reduction of $0.5 billion from last year's earnings. This has been attributed to a weaker global economy and a reduced demand in China. Sales and operating revenues were reported to be $60 billion. It was $67 billion last year. Chevron also has a gross profit margin of 30.7% and a pre-tax profit margin of 19.4%. This is close to the industry standards and does not reflect negatively on the company. At 12.1% of return on assets, Chevron is still one of the more favorable stocks to invest in. Total debt to equity ratio was revealed to be 0.08.
With a ratio of 1.1 when it comes to revenue and assets, investing in Chevron is a wise decision. Chevron's 5-year average numbers are very impressive too. The company has an average of 20.5% return on equity, while its return on assets is 11.4%. In the last 5 years, the company has reported an average gross profit margin of 28.8% and a net profit margin of 9.1%. Chevron certainly is the most reliable and formidable oil company out there, and only Anadarko matches to its reliability.
We must remember that Shell (RDS.A) has faced a lot of flak in Nigeria because of its laggardness in cleaning up the oil mess it has left behind after a series of accidents. The company has not been as proactive as other companies in making sure that safety measures are met. It is precisely for this reason that Exxon Mobil, BP, Anadarko and other oil companies have resolved to stay safe during Storm Isaac. Chevron on the other hand is playing a little risky by continuing its production.
I surmise that this decision stems from its previous experience in handling natural disasters like storms and hurricanes. As far as investors are concerned, Chevron is a company that is well prepared for storms and hurricanes both figuratively and literally. It is one of the most attractive investment options available at the moment when we look at long-term potential.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.