Exxon, Look Out for Chevron!

Includes: CVX, XOM
by: Hilary Kramer

The second largest oil company in the US, Chevron (NYSE:CVX) can pack a punch in your portfolio. Over the last three years, its operating profits have multiplied six fold. And with no sign of oil prices dropping, I think Chevron is a solid pick.

Chevron is in more than 180 countries operating across all segments of the petroleum industry. In 2005, its refining capacity was 2.2 million barrels a day, and its retail distribution network consists of 26,500 service stations.

Sure, Chevron has all the other problems of the big oil producers -- the biggest one at this time is that there isn’t much easily obtained oil out there. With oil becoming a more and more scarce commodity, Chevron has been one of the most active in exploration, partly as it values oil at a higher price than other oil giants (at $20-30 per barrel, rather than the standard $15-25). It sees future reserves as extremely profitable, and thus more important to pursue. I happen to agree with this approach –- I think the black stuff is only going to become more scarce – but analysts worry it might encourage them to over-invest in long-frame future projects and will suffer if the price of oil drops. While I’m not a glass is half empty gal, I simply don’t see oil prices declining steeply.

Most of Chevron’s sights are set on overseas projects, developing big oil fields in Kazakhstan and offshore in West Africa, as well as building an integrated global gas business. Doing business in such unstable parts of the world gives me pause – certainly a lot could go wrong in Kazakhstan, but with this risk in mind, I still think Chevron is a strong long term choice.

Chevron merged with Texaco in 2001, creating economies of scale and streamlining its operations, positioning itself to one day move into market leader spot. Integrations really take years to accomplish and the newly merged entity is finally operating as one single organizations. Watch out Exxon (NYSE:XOM)!

Type of stock:
With a $150 billion market cap, Chevron is definitely behind Exxon Mobil’s $418 billion. But it is going strong and there is room for growth. Profit windfalls from recent high oil prices have not hurt. Chevron’s emphasis on overseas expansion and exploration is smart, if you also believe that oil is a dwindling reserve whose price is only going up.

Price target:
While long-term, costly projects in potentially unstable regions abroad like Kazakhstan increase risk, Chevron has spread itself across the globe and I think these are risks I can stomach. Trading in the high $67 range, this is a nice long term addition to your portfolio, and I believe that Chevron has upside growth (that Exxon just can't achieve). Expect Chevron to rise to the $90's by 2008.