The crisis in Ukraine has gone on far longer than anyone
thought it would and shows little sign of ending. While Russia
has pulled its troops back from the border, there is good reason
to believe that tensions will persist and rhetoric will continue
to heat up on both sides.
#-ad_banner-#It could get real ugly real fast -- if not for
the fact that both sides desperately want to avoid an escalation.
The eurozone sends 7.4% of its exports to Russia and receives 12%
of its total imports, mostly in energy products. Russia sells
more than half (53%) of its exports and receives 42% of its
imports from the region.
Russia may fall into a technical recession on second-quarter
GDP results, and Europe just pulled itself out of more than a
year of declining economic activity. Neither can afford the loss
of an important trading partner.
The competing economic and social forces could mean a
protracted standoff. And that could mean big changes to oil
exploration in Europe -- and one company in particular.
Russia has responded to sanctions by threatening a cut to
energy exports. The eurozone depends on imports from Russia for
40% of its natural gas, and Russia often uses its oil wealth as a
"big stick" motivator. However, the constant threat is wearing
thin, and the Group of Seven is developing policies to reduce
European dependence on Russian energy.
The Continent produces little from its own fields, and
non-conventional drilling (namely, fracking) is banned or under
moratorium in many countries. Still, the Energy Information
) estimates Europe's recoverable reserves of natural gas at as
much as 600 trillion cubic feet (Tcf), compared with the region's
annual demand of 18 Tcf. The International Association of Oil
& Gas Producers estimates that Europe could create 1.1
million jobs and significantly reduce its dependence on Russia if
it were to explore its own fields more aggressively.
Few companies are as well positioned to take
advantage of future growth in European natural gas
production as Chevron
Few companies are as well positioned to take advantage of
future growth in European natural gas production as
. The company plans to invest nearly $600 million over the next
15 years in Romania alone. Chevron has been awarded exploratory
permits in Ukraine and is partnering with a domestic Polish
company to evaluate resources. Bulgaria, which has recently
softened its stand on fracking, granted Chevron a permit to
explore the country's estimated 17 Tcf of gas reserves.
As tensions escalate with Russia, look for more calls for
exploration -- and for Chevron to win more projects.
Beyond the upside from European gas, Chevron is a strong
long-term investment in the U.S. energy independence story. The
company is coming off a period of huge capital expenditures on
liquefied natural gas (
) and heavy oil projects but should see these projects start to
generate cash flow in 2015.
The company's capital spending totaled nearly $38 billion last
year, 22% higher than in 2012 and almost double its 2010 total.
Its massive Gorgon LNG project in Australia is 80% complete and
on track for mid-2015, and the deepwater Tubular Bells
development in the Gulf of Mexico is about 90% complete.
Management expects cash flow from operations to nearly double to
$65 billion by 2020 from $35 billion last year.
With a yield of 3.4% and a growth rate of 11.6% over the past
three years, Chevron is a strong dividend payer. The payout ratio
is just 39%, leaving plenty of cash for growth or for future
dividend increases. Chevron has been paying a dividend for over a
century and is on a 19-year streak of increases.
My one-year target of $140 is 12% higher than the current
price, but it's misleading because the real value of the shares
is as a "Forever Stock." Shares have returned an annualized 13.4%
over the past 30 years, making Chevron a good addition to any
Risks to Consider:
As a multinational energy company, Chevron is exposed to a
number of geopolitical risks as well as the price of the
commodities it supplies. These, along with the risk of an
environmental incident, are unforeseeable, and investors need to
keep a long-term view when shares fall on short-term events.
Action to Take -->
Chevron has one of the largest global footprints of the major oil
companies and is poised to benefit from European demand in the
future. Set this one on your list of regular buys, and your
retirement portfolio will thank you.