On Apr 2, 2014, we issued an updated research report on San
Ramon, CA-based energy giant
). We continue to view the company as a core holding in the
large-cap integrated space based on its relatively low-risk
conglomerate business structure, fortress-like balance sheet,
ample free cash flows even in a low oil price environment and
Chevron is one of the six super major oil and gas companies in
the world and the second-largest energy firm in the U.S. behind
Exxon Mobil Corp.
). As a vertically-integrated oil entity, it is engaged in oil
and gas exploration and production, refining and marketing of
petroleum products, manufacturing of chemicals, and other
Driven by the big Australian liquefied natural gas (LNG) projects
(Gorgon and Wheatstone), as well as deepwater developments in the
U.S. Gulf of Mexico, Chevron is targeting volume growth of 25% by
The company's financial flexibility and strong balance sheet are
real assets in this highly-uncertain period for the economy.
Chevron remains in excellent financial health, with more than $16
billion in cash on hand and an investment-grade credit rating
with a debt-to-capitalization ratio of just over 12%.
Management has established quite a track record of
conservative capital management and cash returns to shareholders.
It also pays a growing dividend, currently yielding an attractive
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Chevron has targeted quarterly buybacks of up to $1 billion of
its common stock since late 2010. We believe that the repurchase
program not only highlights the company's commitment to create
value for shareholders but also underlines Chevron's confidence
in commodity prices.
However, as is the case with other companies engaged in the
business of exploration and production, Chevron's results are
directly exposed to oil and gas prices, which are inherently
volatile and subject to complex market forces. Realized prices
could differ significantly from our estimates, thereby affecting
the company's revenues, earnings and cash flows.
Chevron has pegged its 2014 capital budget at a massive $39.8
billion. This is expected to substantially increase Chevron's
leverage and deteriorate its credit metrics. Additionally, the
increasing capital intensity of its operations may result in
reduced returns going forward.
Chevron currently carries a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
While we expect Chevron to perform in line with its peers and
industry levels in the coming months and advice investors to wait
for a better entry point before accumulating shares, one can look
Range Resources Corp.
Abraxas Petroleum Corp.
) as good buying opportunities. While Range Resources holds a
Zacks Rank #1 (Strong Buy), Abraxas Petroleum carries a Zacks
Rank #2 (Buy).