by Tom Taulli | February 5, 2014 2:18 pm
Chevron (CVX) has had a bad start to the new year, dropping 11% so far in 2014. For a company of its scale and stability, that’s a frighteningly big move.
It certainly didn’t help that the company announced a dismal fourth-quarter earnings report. Profits plunged by 32% to $4.93 billion, or $2.57 per share. In fact, the company missed Wall Street’s revenue expectations by a whopping $9 billion. Given this performance, it is no wonder that CVX stock has been selling off like crazy.
But might this be an opportunity to pick-up a solid blue chip at a discount — and one with a nice dividend, at that? Let’s take a look at the pros and cons:
Efficient operator: CVX stock has benefited from huge scale, with operations that span mining, chemicals and power generation. Yet, among its peers, the company is standout in its efforts to find cost savings. Its earnings per barrel come to about $23.33, which is $5 ahead of companies like BP (BP), Royal Dutch Shell (RDS.A), Total (TOT) and ExxonMobil (XOM). But CVX the company is also one of the world’s largest producers of Liquefied Natural Gas (LNG), which has benefited from strong growth in places like Asia and Europe. Besides, LNG has massive barriers of entry because of the substantial requirements for infrastructure, logistics and technology.
Secular trends: According to the 2013 EIA International Outlook, spending on energy will grow by 45% over the next 20 years. While other sources of energy will get a higher share, like solar, it still is likely that fossil fuels will remain the largest market. Yet there’s a good chance that prices will increase over time because of the difficulties of finding new supplies. By 2035, there will need to be 65 million barrels per day of new production. To gear up for this, CVX has invested huge amounts towards exploration in places like Australia, West Africa, Iraq and parts of South America. The company should also benefit from its expertise in dealing with harsh environments, such as deposits in remote places of the earth or deep-well drilling.
Financials and valuation: Even with the Q4 slip, CVX stock remains a top performer. For 2013, cash flows from operations came to $35 billion. A key use of the cash has been for dividends. Consider that last year marked the 26th consecutive increase in the annual dividend payout. As of now, the yield is 3.6%. The valuation of CVX stock is also attractive, with a forward price-to-sales ratio of only 10X.
Complexities: Mega energy projects are not only expensive and time-consuming but also prone to severe problems. While CVX has strong platform and highly talented employees, the company still has faced many issues. A recent example is the $49 billion natural gas venture in Australia, which has been dogged with complications. The budget has ballooned as the company has had to deal with adverse weather, currency volatility and mounting labor costs. All of those factors will weigh on CVX stock.
World economy: With the Federal Reserve “tapering” its easy monetary policy, there have been shockwaves across the global economy. What’s more, there are signs that China is undergoing a deceleration. So if there is a worldwide slowdown, it is likely that there will be further pressure on oil prices, which will certainly crimp the results for CVX stock. The disarray in emerging markets is also having a huge impact on currencies, which could result in lower earnings as well.
Production: CVX has been lagging on this front lately. Even with huge investments in exploration, it has been tough to find new reserves. The fact is that new sources of oil are generally in remote parts of the world or in places that have volatile political systems. In the latest quarter, Chevron’s global oil-equivalent production came to 2.58 million barrels a day, down from 2.67 million in the year-ago period. If not solved, this lingering problems could really hurt CVX stock in the long run.
There’s little doubt that Chevron had an awful quarter. But then again, other major oil operators have also had difficulties.
Despite all this, CVX stock is in a good position. It has critical expertise in deep-well drilling and also lucrative businesses in categories like LNG. More importantly, over the long-term there will likely be steady increases in demand for energy. And yes, the valuation on CVX stock is attractive and so is the dividend, which has been like clockwork.
So should you buy Chevron? Yes — for now, the pros outweigh the cons on CVX stock.
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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