by Tom Taulli | November 6, 2012 9:50 am
Last Friday, Chevron (NYSE:CVX) reported third-quarter results … and they weren’t so pretty. Earnings plunged 33% year-over-year to $5.25 billion, or $2.69 per share. Revenues were off by nearly 10% to $58 billion. Both numbers missed The Street’s consensus.
This isn’t all-that surprising, though. Chevron’s stock has been a laggard throughout 2012. It has returns of only about 2%; the S&P 500 is up about 12.5%.
Is Chevron ready for a bull move, then … or will the listlessness continue? To see, here’s a look at the pros and cons:
Growth Potential. Over the years, Chevron has invested heavily in Asian markets, which are expected to see strong demand growth. The overall population is more than 4 billion and the GDP rates remains robust. Chevron’s Asian Caltex brand, which is managed in Singapore, has been around for over 75 years. Plus, the company has been aggressive with partnerships in countries like Korea, Thailand and Australia.
Deepwater. Chevron has a long background and expertise in this category. While deepwater drilling can be extremely expensive and dangerous — as seen with the BP (NYSE:BP) disaster — the growth potential is enormous. Chevron has a strong footprint in areas like the Gulf of Mexico, West Africa, the Gulf of Thailand and Australia.
Financials. For the first nine months of 2012, Chevron generated $26 billion in operating cash flows. With the inflows, the company has been buying up its shares. There will $1.25 billion in purchases in the third quarter alone, for example. It looks like the company will spend about the same for the fourth quarter. On top of that, the dividend is also attractive, yielding 3.2%.
Macroeconomy. The global economy is slowing down and the situation could get worse, especially with the looming fiscal cliff in the U.S. With lower demand, there has already been a drop in crude oil prices. Since late February, the WTI crude price has gone from $109 to $84. If the trend continues, it will likely mean lower revenues and profits for Chevron.
Reserves. The bottom line is that it is getting tougher and tougher to find new sources. Plus, when there are discoveries, they are usually in harsh environments or in countries where the government wants to extract large amounts of the profits. As a result, exploration is often risky for the mega oil operators. In the latest quarter, Chevron saw production fall about 3% on a year-over-year basis. The company is not alone, though, as other major operators — including Exxon Mobile (NYSE:XOM), ConocoPhillips (NYSE:COP) and Royal Dutch Shell (NYSE:RDS.A) — have also suffered problems.
Dangerous. Deepwater oil drilling is fraught with risks. The investments are expensive and the possibility of hitting a dry-hole is always an issue. Plus, oil spills are of course problematic. Currently, Chevron is involved in protracted litigation with the Brazilian government because of a 2,000-barrel oil spill off the country’s shores.
Chevron has certainly run into some headwinds lately with lower production, problems in Brazil and higher costs from foreign exchange. Really, though, those are short-term problems.
The fact remains that Chevron is likely to be a steady grower as it benefits from the secular trends in Asia. The company should also get a boost from its petrochemicals business, which has been a nice source of revenues.
What’s more, with continued strong cash flows, the stock also has some support. So in light of all these factors, the pros outweigh the cons for now.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.“ Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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