Chevron Could Be Plotting a HUGE Buyout

by Jeff Reeves | August 28, 2012 2:12 pm

Chevron Could Be Plotting a HUGE Buyout

Chevron (NYSE:CVX[1]) is an energy stock that has mammoth scale and brand recognition. It is a Dow component with revenue that tops $250 billion annually and is one of the ten biggest stocks on all U.S. exchanges when ranked by market cap — putting it in the same ballpark as General Electric (NYSE:GE[2]) and AT&T (NYSE:T[3]).

So you have to wonder: What kind of move would Chevron make if it wanted a big acquisition?

And this buyout talk isn’t just academic. Chevron is hoarding the money it makes from oil and gas operations at a staggering rate — about $21.5 billion in cash as of its most recent earnings report, compared with just $17.9 billion a year ago.

What’s more, CVX appears to be getting liquid. Whereas in June of 2011 Chevron had just $13.3 billion in cash and $4.6 in short-term investments, now it has a mere $250 million invested as of June 2012. The rest is cold, hard cash.

Why else would it be doing this unless it want to make a deal?

The Wall Street Journal[4] postulates it will be snapping up a smaller rival in a bid to close the gap with giant Exxon Mobil (NYSE:XOM[5]). There may be signs Exxon is willing to play too, as it has about $17.8 billion in cash in June — up from just $8.3 billion in June 2011 — and another $1.7 billion in short-term investments.

But with a 20% gap between XOM and CVX war chests, Chevron is far and away the energy company with the most cash on its balance sheet.

So should you bet on Chevron stock before any buyout? Maybe. But rumors of an acquisition are never reason to jump in by themselves.

Chevron has a lot going for it. CVX just celebrated its 25th year of consecutive dividend increases, and joined our list of Dependable Dividend Stocks[6] as a result. It yields 3.2% right now, and this energy stock has paid dividends since 1912.

Also, shares are up about 16% in the last 12 months, in step with the Dow Jones Industrial Average, and five-year performance is 29% profits vs. a small loss for the benchmark Dow index.

Throw in its scale and stability, and you have a good low-risk income play for the long term.

An acquisition in the natural gas business could be possible for CVX. After all, Exxon snapped up XTO Energy for a whopping $41 billion in late 2009 as the ultimate hedge against crude oil declines. It just so happened that natural gas prices got even softer and the deal hasn’t been fantastic in the short term — so maybe Chevron is looking to make a similar play at even cheaper asset valuations in the natural gas sector.

Heck, after a 40% flop in about a year, much-maligned Chesapeake Energy (NYSE:CHK[7]) may be the target. After all, it’s just $12.8 billion at current market capitalization. Chevron could devour this stock while paying a premium and not bleed the coffers dry in the process.

Still, it’s worth wondering why Chevron would get bigger even as some companies in energy are getting smaller via spinoffs. ConocoPhillips (NYSE:COP[8]) spun off Phillips 66 (NYSE:PSX[9]) refining business to separate upstream from downstream operations. Marathon did the same thing with Marathon Oil (NYSE:MRO[10]) and Marathon Petroleum (NYSE:MPC[11]).

Getting bigger has its risks, especially if you’re already one of the biggest players out there to begin with. 

Whatever shakes out, it will be interesting to watch how Chevron makes its move. That cash hoard can’t just be sitting there for no reason — and with oil prices approaching $100 again after bottoming out at under $80 just two months ago, the time may be ripe for a big energy move before prices push any acquisition target out of reach.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[12] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Endnotes:
  1. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  2. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  3. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  4. The Wall Street Journal: http://professional.wsj.com/article/SB10000872396390444082904577605600459091254.html?mod=WSJ_hp_LEFTWhatsNewsCollection
  5. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  6. Dependable Dividend Stocks: http://investorplace.com/dividend-paying-stocks/
  7. CHK: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHK
  8. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  9. PSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=PSX
  10. MRO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRO
  11. MPC: http://studio-5.financialcontent.com/investplace/quote?Symbol=MPC
  12. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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