Chevron (CVX) has come under the lens lately due to a decline of nearly 7% in earnings for the second quarter of 2012, and I am here to tell you why Chevron still continues to be an excellent play in the oil and gas industry. First and foremost, I believe it is pertinent to point out that Chevron continues to lead the industry in earnings per barrel, currently at $26.36 per barrel, outperforming by no small margin, its closest competitors BP (BP), Total (TOT) and Royal Dutch Shell (RDS.A) by over $7 per barrel, as well as the industry average by about $9 per barrel.
Add to that the fact that Chevron's market price hasn't declined for the past three months. From June 2012 until August 2012, the market price of Chevron has actually increased in the recent quarter from $96.65 to $110.77. Recent recommendations from analysts have rated the stock a Buy/Hold. Furthermore, the only analyst who earlier rated the stock underperform has changed his recommendation to 'buy and hold". Volumes have remained steady throughout, since the release of the second quarter earnings, indicating no cause for worry.
At a solid 25% payout ratio and dividend yield of 3.1% (BP at 1.86%, Valero (VLO) at 2%), Chevron is in a somewhat surprisingly good cash position, especially considering that it increased dividends from $0.78 to $0.90 per share for the most recent quarter. Despite the fact that Chevron's cash and cash equivalents have gone down by 22%, its retained earnings have gone up by over 7%.
Looking to the future, Chevron has more than adequate exploration positives on the horizon. With fairly large holdings in the Utica, Marcellus and Permian formations, Chevron has a lot of liquid rich assets. Production rights to the Pakarang oil and gas field in Thailand are expected to produce 4,300 bbl/day of crude oil and 59MMcf/day of natural gas. In addition, Chevron has confirmed the expansion of the Bibiyana natural gas field in north-western Bangladesh, which is expected to supplement Chevron's natural gas production by about 300 million cubic feet per day to 1.4 billion cubic feet per day, in addition to about 4,000 barrels per day of natural gas liquids. With expected initial dates of 2014 for Bibiyana and 2015 for Thailand, the long-term outlook for Chevron's reserves is definitely positive.
Chevron currently possesses 6.455 million barrels of oil alongside 28.683 billion cubic feet of natural gas, as of December 31, 2012, up from 24.251 billion cubic feet previous year. Chevron has also confirmed that it will continue with the development of the Lianzi field, which is located in an offshore zone between the Republic of Congo and the Republic of Angola, which is likely to produce around 46,000 barrels of oil equivalent per day. This is of course, in addition to the 120 wells it plans to drill in Argentina over the next 3 years. This is yet another unconventional play by Chevron, this one targeting shale resources.
Having already mentioned some technicals for Chevron, I'm compelled to point out further some key statistics. Considering the rise in dividends and fall in earnings, I must grant credit to the management for still managing well. Chevron has a levered free cash flow balance of $10.65 billion, up from was $60 million last year in the same quarter, as compared to British Petroleum's $10.62 billion and Valero's $289.38 million). Chevron ranks as the leader of the industry in terms of return on assets at 11.27% as well as return on equity at 21.59%. When compared to the industry averages of 7.6% (return on equity) and 4.54% (return on assets) respectively, and with competitors such as BP (return on equity-15.90% and Return on Assets-4.97%) and Valero Energy (return on equity-10.09% and return on asset- 6.04%), I don't believe any further explanation is warranted. The price earnings multiple comes in well under the industry's 11 times at just about 8 times, making it a good investment opportunity.
In summary, I believe Chevron continues to be a great long-term play, particularly for those targeting good dividend income. The earnings decline in the recent quarter is highly misleading, considering it was due to a fall in oil prices, which is really beyond Chevron or any other oil and gas, particularly upstream, company.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.