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Chevron Fueled for Fine Future

Top pick Chevron, a Buy and Long-Term Buy, as rated by Richard Moroney, Dow Theory Forecasts, www.dowtheory.com, distinguishes itself from rivals in four key ways.

“Even companies as massive as Chevron (CVX), with $160 billion in revenue over the last year and a stock market value north of $220 billion, can seem like afterthoughts in the sea of business news. With bellicose trade policy, falling interest rates, a choppy stock market, and trends in smartphone sales grabbing headlines, who cares about oil and natural gas?

Of course, integrated energy producers are as important to the economy today as ever. According to the International Energy Agency, global demand for natural gas and petroleum liquids will rise to nearly 200 million barrels of oil equivalent per day by 2040, up from about 165 million barrels per day in 2017. That annualized growth rate of 0.8% vastly understates the need for new resources, however. Existing supplies will not satisfy the need, with the EIA estimating a supply gap of 88 million barrels per day by 2040, which can only be met by production not yet online.

If you’d like a piece of that action, our top pick is Chevron, a Buy and Long-Term Buy that distinguishes itself from rivals in four key ways.

Production power. The world’s five largest U.S.-traded oil companies averaged increases of 4.7% in oil-equivalent production in the 12 months ended June. Chevron nearly doubled that average with 9.2% growth. The company projects 4% to 7% growth in production for full-year 2019. That target that seemed out of reach as recently as three years ago, when production declined and the company kept projecting better times ahead. Those good times are officially here.

Greater growth. Over the last 12 months, Chevron grew sales 7% (versus an average of 1% for the five largest producers), per-share profits 45% (versus 20%), and operating cash flow 39% (versus 27%). The growth came about the old-fashioned way – boosting production volumes and squeezing more profit from every barrel. Oil prices fell year-over-year in each of the last two quarters.

Enhanced efficiency. Most large oil companies have seen their profit margins rise over the last year, but Chevron has its rivals beat. The company’s operating profit margin of 21.2% in the year ended June is tops among the oil titans, more than four percentage points above the second strongest. Chevron’s margin rose 2.0% over the last year and 5.8% over the last five years; consensus targets imply higher margins and returns on assets and equity going forward.

In addition, Chevron claims to have the highest earnings per barrel of oil ($14.45) and refined products ($2.66), coupled with the lowest cash flow breakeven point ($51 per barrel for North Sea Brent crude) among the oil giants.

Appealing assets. Chevron’s resources in the Permian basin are now estimated at more than 16 billion barrels of oil equivalent, up from 9 billion barrels in 2017. The company had been investing heavily in production for years before it saw growth, and longtime giant projects such as Gorgon and Wheatstone off the coast of Australia are finally generating cash rather than gobbling it, helping to fund both their own expansion and newer projects.”

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