Chevron - Soft Third Quarter Provides Long Term Investors With Excellent Entry Point

Oct.10.12 | About: Chevron Corporation (CVX)

Chevron (CVX) the large oil and gas conglomerate, gave a third quarter interim update after the close on Tuesday. Shares of Chevron lost some 1.5% in after hours trading.

Third Quarter Update

Chevron issued a cautious third quarter interim update. For the third quarter of 2012, the company expects earnings to come in below the level of the second quarter. Chevron net earned $7.2 billion, or $3.66 per diluted share in the second quarter of 2012. Chevron is expected to report its third quarter results on the 2nd of November.

Upstream Business

Upstream earnings are lower as a result of foreign exchange losses and lower liftings and realizations. For the months of July and August, domestic oil production came in at 442,000 barrels per day, down from 461,000 in the second quarter of this year. The decline is due to the impact of hurricane Isaacs.

International oil production fell by 87,000 barrels per day to 1.24 million barrels, as a result of planned maintenance in the United Kingdom and Kazakhstan.

Domestic natural gas production came in at 1,185 MMCFD, unchanged from the second quarter. International gas production came in at 3,819 MMCFD. In total, Chevron achieved an oil-equivalent production of 2.5 million barrels for the first two months of the quarter.

Realized prices were down on the back of lower oil prices in general, and a steepening discount of WTI spot prices compared to Brent spot prices. Natural gas prices in the US recovered, still trading far below international natural gas prices.

Downstream Business

During the quarter, US and international refining margins increased sharply. Especially US West Coast and Gulf Coast margins were strong amidst tight market circumstances. Refining volumes declined by roughly 10%, or 92,000 barrels per day as a result of a fire at Chevron's Richmond refinery. Strength in the refining business was offset by weakening marketing margins. Furthermore, downstream earnings are impacted by unfavorable inventory impacts and negative mark-to-market effects on derivative contracts.


Chevron ended its second quarter with $21.5 billion in cash, equivalents and short term investments. The company operates with $10.2 billion in short and long term debt, for a net cash position of roughly $11.3 billion.

For the first six months of 2012, Chevron reported revenues of $123.3 billion. The company net earned $13.7 billion, or $6.93 per diluted share. The company did unfortunately not provide a full year outlook. Based on some realistic assumptions, revenues could come in around $240 billion. After Tuesday's cautious comments, a $25 billion annual profit target seems realistic, resulting in earnings per share around $12.50.

Factoring in a 1.5% drop in after hours trading, the market values Chevron at $226 billion. Excluding the net cash position, this values operating assets at $215 billion. This values the firm at 0.9 times annual revenues and merely 9 times annual earnings.

Currently, Chevron pays a quarterly dividend of $0.90 per share, for a dividend yield of 3.1%.

Investment Thesis

Year to date, shares of Chevron have risen some 10%. Shares traded between $100-$110 for most of the first six months of the year. In last weeks, shares broke out of the $110 resistance level, currently exchanging hands at $116 per share.

Over the past five years, shares have risen roughly 25%. This excludes the decent dividend yield, which investors have received in the meantime. Shares hit lows of $60 in 2008, during the darkest days of the financial crisis and recovered to all time highs at the moment. Between 2008 and 2012, the company saw a decline in annual revenues from $265 billion to an expected $240 billion. Net income is expected to rise modestly from $23.9 billion in 2008, to $25 billion in 2012.

At the end of July, I already had a look at Chevron after the company reported its second quarter results. Shares traded around all time highs of $110 at the moment and have seen modest gains over the past two months.

The investment thesis in Chevron remains very attractive for a range of reasons. First of all, the company has a rock-solid balance sheet with a sizable net cash position. Furthermore, shareholders receive a decent dividend yield of 3.1%, and the company is repurchasing its own shares at a moderate rate. Most important is the massive Gorgon project in Australia, still expected to come online by the end of 2014. The enormous project, located in a stable political area secures the company's growth profile over the coming decade.

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. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.