In its most recent report, CVX announced that profits fell by nearly 7% to $7.21 billion, or $3.66 a share, though it was enough to beat the Street consensus of $3.24 a share. However, revenues that shrunk 9% to $62.6 billion were significantly below expectations for $71.4 billion.
The past three years have been particularly strong for the company, with an average annual return of close to 20%. However, things have been much less stellar in 2012, as CVX shares have seen a gain of just about 5% — far shy of the broader markets, and again similar to the underwhelming performance of other energy majors, such as BP (NYSE:BP) and Exxon Mobil (NYSE:XOM).
But it’s hard to think oil and gas prices will stay depressed forever. So should you buy Chevron now before the good times flow once more? To decide, let’s take a look at the pros and cons:
Efficient Operator: Chevron has had a strong focus on cost-cutting over the years, which has helped the company achieve high levels of earnings per barrel. In the latest quarter, the average was an impressive $26 — compare that to Exxon Mobil’s, which stands around $19.
Strong Financials: In the second quarter, CVX posted almost $10 billion in operating cash flows, and its total cash position is now $21 billion. Chevron continues to buy back its stock, with purchases coming to $1.25 billion in the latest quarter. It’s also able to pay out 90 cents per quarter, good for an attractive 3.2% current yield.
Exploration: This is a key priority for Chevron; the company plans to invest $3 billion in its efforts for the year. A big part of this will go to the Gulf of Mexico, but Chevron also has promising initiatives in Australia, West Africa, Iraq and parts of South America.
Production: Even with new technologies, it is still difficult to locate new reserves of oil. And when discoveries are made, they usually are in remote regions of the world or in politically unstable areas. And Chevron has been feeling the pressure on this end. In the second quarter, the company saw a 2.6% drop in production to 2.62 million barrels of oil equivalent a day.
Global Economy: Just about every end of the world has been slowing, and it’s unclear how long the decline will last, or how severe it will get. Europe continues to engage in austerity in hopes of recovering from its debt crisis, and the U.S. likely will see budget cuts, too. Chevron even has felt the pain from slower-than-anticipated Chinese demand for imports.
Safety: In light of the BP oil spill, the issue of safety has come to the forefront, and countries have been getting more aggressive with their regulations. While Chevron has had a good record, it is far from perfect — just look at its 2,000-barrel oil spill off the shores of Brazil in November. It has resulted in a contentious dispute, and the company has had to suspend its operations in the country. Chevron ultimately should be able to get the project back on track, but in general, energy companies won’t be afforded the leeway they once were.
Chevron — like just about every other oil major — still faces headwinds, but the prospects look bright for the long haul. The company should bolster its production because of its investments in exploration. It also helps that Chevron has expertise in deepwater drilling, which is likely to be a growth area; the situation already has improved substantially in the Gulf of Mexico.
In addition to Chevron’s great long-term prospects, you’ll also have a nice dividend to keep you company, and you can get in at a fairly cheap 8 times earnings.
So should you buy Chevron? Yes — for now, the pros outweigh the cons on the stock.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.