by Tom Taulli | May 2, 2013 2:23 pm
Chevron (NYSE:CVX) managed to beat the Street yet again with 3% earnings growth, continuing a virtuous cycle in which CVX’s consistent results are rewarded with shareholder returns. The past year has seen Chevron appreciate by 15%, just under its three-year annual average of 16%.
However, oil prices have been volatile lately, and that has put pressure on margins. So should investors exert a little more caution concerning Chevron, or is it still full steam ahead? To see, let’s look at the pros and cons.
Production: Chevron’s production is projected to improve by 1.5% this year, and the company continues to invest heavily in exploration. Promising developments have popped up in areas like Nigeria, Morocco, Australia and China, and Chevron also has a strong footprint in the U.S. via lucrative fields such as those in the Marcellus shale region. CVX earns an average of $37 per barrel, which is the highest among other majors — including Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A, RDS.B) and BP (NYSE:BP) — which average roughly $31 per barrel.
Liquefied Natural Gas: This is an oft-overlooked but big part of Chevron’s business. The barriers to entry are substantial since LNG requires tremendous resources for infrastructure, logistics and technology. And LNG is a nice growth business, with demand having doubled since 2000 and expected to double again by 2025 as Asian and European countries increasingly import LNG to meet their needs.
Rewarding Shareholders: Chevron increased its dividend by 11% for 2013, in line with its growth rate since 2004, to put its yield around 3.3%. The company also has been aggressive with share repurchases; it bought back $1.25 billion in stock in the prior quarter and expects to repurchase the same amount in Q2.
Oil Prices: Oil has gone into bear mode of late, thanks to both sluggish economic growth and the lack of any substantial geopolitical tensions. It’s far from clear whether these factors (and oil’s relaxed price) are temporary, or the start of a longer-term trend. Oil prices have been depressed for extended periods before, after all.
Exploration Risks: Chevron has a good track record with production and clearly is willing to spend on exploration, sure, but it’s being forced into more expensive investments in deepwater wells and projects in harsh environments. Not to mention, even when developments are successful, CVX’s extended reach into the corners of the globe also exposes it to issues like heavy taxation and even the threat of nationalization.
Liabilities: While Chevron has had a fairly good safety track record, the company must still deal with liability exposure. One interesting case is in Ecuador. Because of environmental damage that occurred from 1964 to 1990, Chevron lost a massive legal case worth about $19 billion. The case looks dodgy and might have been tainted with fraud, so it could be thrown out — but it highlights this particular risk of the oil business.
Chevron is a fairly steady cash machine with a diversified platform of oil, gas, chemicals and refineries. Plus, it’s exposed to nice growth drivers like LNG and its valuable shale properties in the U.S.
Not to mention, there’s few more reliable dividend stocks than CVX, which has written checks for just more than a century and has increased its payout for 26 consecutive years, making it one of InvestorPlace‘s Dependable Dividend Stocks.
So should you buy Chevron? Yes — for now, the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. 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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