Chevron: An Analysis

Chevron Logo

It’s end of third quarter, and the disaster in my portfolio continues. I’m currently down almost -10% in the quarter and -7% YTD, which on both counts is worse than the market. Some of it is deliberate as I have increased my exposure to the oil industry significantly, buying 2017 futures, and building up postions in Valero, ExxonMobil and Chevron. While Valero has been up a whole lot, the rest have gone nowhere fast. Only an oil rally will save me now. However, I’m not bothered as I prefer to look at investing as holding an ownership stake at a great price in an ongoing business, versus paper wealth to trade in and out of. You don’t close your bakery just because bread prices slowed down, neither do you shut your factory every time the economy slows down. So selling my stake in a long term great business just because of present economic headwinds would be foolhardy. That said, I’ll discuss the numbers of Chevron’s business somewhat, and summarize why I still see it as a good long term holding. We’ll also see the more information from the company once they make their earnings announcements on the 30th.

The Negatives

Revenues at Chevron fell from $57 billion in Q2 2014, to just over $40 billion in Q2 2015, most of it due to the sharp decline in oil prices since late last year. Even worse, earnings per share for the quarter dropped from $2.98 to a paltry $0.30 which is enough to make a grown man cry, and which led to worries that the company was going to cut or suspend it’s dividend, something that has never happened since before I was born. But the company, through some of the more positive aspects of the business, was able to come through and send that check that so many retirees, old folks, and other shareholders depend on. Nevertheless, oil prices have shown no sign of letting up anytime soon, and the company is estimated to make just $4.00 per share in earnings for the full year, instead of the $10.14 it made last year. The last time earnings fell so precipitiously was in the depth of the recession in 2009.


Fortunately, Chevron has something going for it that my good people at ConocoPhillips don’t have any longer after they split their downstream operations into a separate company (Phillips66), which is the risk hedge that comes from being a diversified oil major. You see, when oil prices crash, while upstream activities become less profitable, downstream activity gets more profitable because the raw material, crude, which they refine into different products to sell at the pump, to households, factories, ships etc to power the economy is getting cheaper while the final selling price remains relatively higher. I pointed this out when I recommmended Valero in February (whose profits have been exploding and whose stock is up more than 25% since I posted about them).  Their downstream profits actually rose from $721 million to $2.56 billion. This has offset some of the profit and loss effects of the oil price crash on their balance sheet.

Second positive is that while Chevron has paused some of its deep water explorations and activities in some parts of the North Sea, it has increased production overall by about 2% year on year  to 2.6 million boe/d in the second quarter ( by ramping up activity in the US, Bangladesh and surprisingly, Argentina). Revenues were still down but I suspect it would have been worse if those increases didn’t happen.

One last positive: everyone expected Chevron to cut or even suspend its dividend entirely. But being the dividend royalty that they are (increasing dividends for decades now, without fail), the company was like (in my own words) “fuck that!” and used a combination of retained earnings, cash from asset sales and a small portion of their debt to hold the dividend constant at $1.07 per share. Full year dividends is expected to be around $4.28 which is still a slight increase from $4.21 last year, although just a 2% increase (versus a 10% average increase over the preceding 3 years). How many of these new fancy oil firms (especially the much hyped shale players ) are increasing their dividends in the midst of this bloodbath? My guess is, not many.

Overall, combined with their assets, strong reputation and finances and the potential for a mild increase in oil prices, Chevron, like their older brother ExxonMobil are likely to do just fine in the medium range, and excellently in the long term.

If your investment horizon is long enough (IRAs, 401k, long term investment plans), there is no way you’re not better off in the future, investing in them, after all is said and done.

Before you buy, however, remember the first rule: always do your own research.


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