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We reiterate our bullish stance on Chevron (NYSE:CVX) because of the consistent improvement in its refinery margins, its capability to cope in difficult times, and its investments in lucrative projects, including Australian LNG, Gulf of Mexico and gas exploration in China. Due to the Hurricane Isaac cyclone and due to a key refinery in Richmond catching fire, the company was forced to lower profitability guidance for the third quarter. The stock fell by 4% after the news, but we believe it will go up considerably after looking at its growth prospects. It expects to restart its production operations in the Gulf of Mexico in the fourth quarter, which will enable the company to restore its high volume growth. Moreover, it is trading at attractive valuations with an EV/ EBITDA of 4.2x.

The company had to lower its third quarter profitability guidance after encountering problems in both its upstream and downstream business segments. Due to the adverse impact of Hurricane Isaac in the third quarter, the company's U.S. oil production has decreased by 19,000 barrels per day over the last two months. Along with this, its international oil production has also decreased by 87,000 barrels per day over the course of the last two months, primarily because of the planned maintenance in the United Kingdom and in Kazakhstan. Moreover, the decline in crude oil prices in the last two months to reach $90 per barrel reflected in lower profits guidance for the company. However, in our opinion, it will enhance its production volume in the fourth quarter with the restoration of its operations in the Gulf of Mexico. Along with this, the increasing United States gas realizations, raised to $2.67 in the last two months, is a positive sign for the company's future profitability.

Its downstream business is also expected to post lower profits in the third quarter, primarily because of the shutdown of one of its key refineries in Richmond, California. The fire hit the Richmond refinery badly, rendering it unable to restart its operations in the fourth quarter. This adverse impact led to a substantial decline by 92,000 barrels per day in its U.S. crude refinery volumes over the course of first two months of the third quarter. Moreover, the decline in refinery volumes is also reflected in the disruptions caused by Hurricane Isaac at its Pascagoula refinery. Conversely, its international crude refinery volumes increased by 42 thousand barrel per day, when compared to the second quarter's production volume. The company's comfortable situation is reflected in the improvement in its refinery margins from both the United States and the international market.

According to a Reuters analyst's estimate, its earnings will be $3.06 per share in the third quarter, down from realized earning per share of $3.56 in the second quarter. Looking forward, we believe its profits will increase considerably after it is able to continue its offline operations.

Comp Sheet

Chevron

Exxon Mobil (NYSE:XOM)

Total SA (NYSE:TOT)

BP plc (NYSE:BP)

Royal Dutch Shell (NYSE:RDS.A)

Forward P/E:

9.34x

11.26x

6.84x

7.4x

NA

EV/EBITDA

4.2

6.4

3.3

4.59

4.44

Source: Yahoo Finance

CVX is trading at an EV/EBITDA of 4.2x, at a discount when compared to its competitors. EV/EBITDA for Exxon Mobil , BP plc and Royal Dutch Shell are 6.4x, 4.5x and 4.4x, respectively. It is trading at a premium when compared to Total 's EV/EBITDA of 3.3x. In our opinion, the company has the potential to cope with the situation and sustain high volume growth, after the resumption of operations in its Richmond refinery. The stock is trading at cheap valuations, and is extremely attractive to long term investors.

Source: Why Should You Buy Chevron On This Dip?