Despite the 11% decline in total revenues over the last one year, the continuous improvement in Chevron Corporation's (CVX) refinery margins, shale gas exploration in China, spending on lucrative projects in the Gulf of Mexico, and Australian LNG, make it a good buy.
It is trading at a multiple of 9.3x to its forward earnings, which is in line with the industry average of 9.5x. The company is planning to capitalize its excessive cash of $21 billion to bring growth through inorganic channels. The recent milestones in its upstream business operations, including the starting of the deepwater Rosebank Project in the United Kingdom, 80% acquisition in the Rovi and Sarta blocks in Iraq, and the announcement of natural gas recovery in Australia, are all critical positive signs. Chevron's good performance is reflected in the 10% increase in its bottom line due to the improvement in refinery margins.
The company's payout ratio of 25% is higher than the industry average of 12.3%. Its dividend yield of 3.1%, along with the strong growth prospects, makes it a good stock for investors.
Due to the lower tax benefits on the Australian LNG and the Gulf of Mexico projects, CVX has enjoyed the highest cash flow margins among its competitors in the Oil and Gas Industry. We believe that going forward the company's margins will expand further, through the lower maintenance expenditure required for longer-living assets. The company has the potential to achieve further economies of scale and register growth through the Tengiz debottlenecking, shale in North America, and Kuwait projects.
The company has collaborated with Argentine's YPF Sociedad Anonima (ADR) for production, development and exploration of shale gas and oil reserves. It has won a bid in Ukraine for shale gas exploration. Moreover, as the map given below depicts, it has increased the exploration and extraction of oil through unconventional wells. This increase is witnessed because of the scarcity of oil reserves through conventional channels. We believe the consistent exploration efforts and the taking up of several projects in the upstream business segment will reflect in the stock price in 1H2013.
Upstream Business Segment
The major proportion of revenues (77%) is coming from the upstream business segment. In its upstream business of exploration and development, the company produced 2.62 million bpd of oil in the second quarter of 2012, slightly lower than the 2.69 million bpd in Q2 2011. The company is ramping up projects in Nigeria, the U.S. and Thailand, which will enable it to produce significant quantities of oil. Its average selling price of natural gas was $2.1 per thousand cubic feet, in contrast to $4.35 in the same quarter last year. The average selling price of crude oil was $97 per barrel, in contrast to $104 per barrel in the second quarter of the last year. Moreover, the company's earnings from international upstream operations are $4.3 billion in Q2, which declined by $619 million over the last one year. This decrease is witnessed mainly because of the low realization of crude oil, and an increase in exploration expenses. In its upstream business operations, the company is generating around 76% of revenues from non-U.S. markets.
Downstream Business Segment
Chevron has registered a 42% increase in its downstream business segment in the last one year. The input of crude oil refinery has considerably increased by 53,000 barrels per day over the last one year. Branded gasoline sales improved by 2%, whereas refinery product sales remained flat between Q2 2011 and Q2 2012. The company's earnings from international downstream business operations have significantly increased from $480 million in the second quarter of 2011 to $1.08 billion in the last quarter.
In our peer group analysis, Exxon Corporation (XOM) and CVX are the two stocks that showed an upside of around 7% in the last 6 months, as reflected in the graph given above. CVX's 50-days' and 200-days' moving averages are $112.3 and $106.3, respectively. Around 64% of the company's shares are held by institutional investors. The company's initiatives and growing demand in the coming years will help the stock show a significant upside in the coming years.
Direct Competitor Comparison
Marathon Oil Corporation (MRO)
British Petroleum (BP)
Forward P/E (2013)
The stock is currently trading at 9.3x its forward earnings, at a discount when compared to Exxon Corporation's forward P/E of 11.3x. It is trading at par with Marathon Oil Corporation 's forward P/E of 9.3x. Both Chevron and Exxon are valuable stocks to consider, due to their high growth prospects and relatively cheap valuations.