On Aug 8, 2013, we retained our Neutral recommendation on San
Ramon, Calif.-based energy giant
). Our investment thesis is supported by a Zacks Rank #3 (Hold).
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EXXON MOBIL CRP (XOM): Free Stock Analysis
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Why the Reiteration?
Chevron is one of the largest integrated energy companies in the
world and has an impressive business model. Its current oil and
gas development project pipeline is among the best in the
industry, boasting large, multiyear projects. Additionally,
Chevron possesses one of the healthiest balance sheets among
peers, which helps it to capitalize on investment opportunities
with the option to make strategic acquisitions.
However, due to its integrated nature, Chevron is particularly
susceptible to the downside risk from any weakness in the global
economy. We are also concerned by the company's high level of
capital spending, which may result in reduced returns going
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 $20
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 3.3%.
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 2013 capital budget at $36.7 billion - up
more than 7% from the $34.2 billion it invested in 2012, which is
quite high by industry standards and puts its expenditure right
next to that of industry leader ExxonMobil. 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.
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
Cabot Oil & Gas Corp.
Matador Resources Co.
) as good buying opportunities. These North American energy
explorers - sporting a Zacks Rank #1 (Strong Buy) - offer
tremendous value and are worth buying now.