Chevron is a world-renowned company that is a leader in the development of energy resources that help drive human progression. The ability to meet the needs of ever-expanding energy consumption is what makes Chevron an innovative and market leading company. When people think of Chevron many think of “Big Oil”, when in fact, its business strategy is very complex and entails: * Exploration and Production (oil and natural gas)
* Manufacturing, Products (lubricants, etc.)
* Transportation (global trading, pipelines, shipping, etc.) * Other businesses (chemicals, mining, power and technology) “The company’s vision is to be the global energy company most admired for its people, partnership and performance“(Chevron.com).
With this being said, the company as a whole is built on a solid foundation of core values. These values include: integrity, diversity, trust, ingenuity, high performance, partnership and protecting people and the environment. Established in 1879, by a group of explorers and merchants, the company was initially named Pacific Coast Oil Co. Through the over 100 years of service to consumers and businesses, Chevron has established itself as one of the premier energy production companies in the world. It has even created its own methodology in “The Chevron Way”. Over the years Chevron has strived to achieve efficiency and effectiveness in its business strategy and operational excellence compared to other companies such as Exxon Mobil.
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BP (2012) stated that in 2011 global oil consumption has increased 0. 7 per cent to reach 88 million BOPD. Despite the fact that the consumption is not picturing a significant amount of growth, according to UNCTAD (2012), in the same period crude oil load capacity reached 1. 8 billion tons and has an account for approximately one third of the total world seaborne trade. Meanwhile, global ...
Increasing stockholder wealth over the years, Chevron has also has been categorized as a “blue chip” stock (CVX symbol on the S&P 500 and DJIA) because of its stability and profitability. Oil and other natural resources are not unlimited and competition for these resources will become even fiercer. With a vast network of business partnerships and resources Chevron is truly a company that has an “upstream” strategy that other companies will have difficulty surpassing. The characteristics of the industry and nature of Chevron’s products varies. The energy production industry is very aggressive and exploration and production of oil and gas are at the core of its business. Chevron has an extensive array of products and services that its business is comprised of. “Chevron is involved in virtually every facet of the energy industry.
It explores for, produce and transport crude oil and natural gas; refine, market and distribute transportation fuels and lubricants; manufacture and sell petrochemical products; generate power and produce geothermal energy; provide energy efficiency solutions; and develop the energy resources of the future, including biofuels” (Chevron 2010 Annual Report).
Crude oil exploration and production is a major aspect of the Chevron business plan and is a homogenously similar product to other companies’, such as Exxon Mobil. The company is not extremely unique in the sense that there are many other oil companies with the same products and similar strategy for market expansion (in different regions).
The pricing strategy for Chevron’s products is to be competitive but also increase shareholder value. The prices of its products tend to fluctuate because of different factors (politics, laws, demand, supply, economies, wars, etc.) around the world affecting oil prices. There are several opportunities that Chevron has identified and acted upon. The first is in its upstream strategy, to grow profitability in its core areas and build new positions. For example,” it has key operating developments in: Australia (Gorgon Project), Cambodia (exploration wells), Canada (mining), China (acreage), Indonesia (production fields), Kazakhstan/Russia (pipelines), Liberia (deep-water blocks), Poland (shale gas), Republic of the Congo (permits on new wells) and Romania (shale gas exploration blocks)” (SEC.gov).
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Chevron’s growth potential looks very promising and its stock is considered to be by many to be a solid, safe buy. Many analysts are placing their bets on Chevron. “Chevron (CVX, news, msgs) shares have grown four times faster than those of rival Exxon Mobil (XOM, news, msgs) during the past year. If you bought Chevron’s shares three years ago, you would have gained an average of 5.6% a year instead of losing 2.4% on Exxon” (MoneyCentral.msn).
Chevron shows a trend of steady increase in stock price.
Having an increasing stock price throughout the years establishes Chevron as a growth stock (immediate and long term) and matches the investment strategy for our portfolio and the proposed purchase of 10,000 shares. The Business Monitor International (BMI) is the oil industry’s “watchdog” and provides unparalleled analysis and risk evaluation. “The BMI model predicts average annual oil demand growth of 1.62% between 2011 and 2015, before slowing to 1.34% between 2016 and 2020” (Americas Oil and Gas Insight).
The continuous increase in demand will assure that Chevron will stay profitable and its stock will remain an attractive buy for investors.
Competition in the oil and energy industry is very intense. Each company is investing money in an upward stream strategy in order to grow their profitability in core areas and also expand in new ones. Chevron is such a large company that it is in a league of “heavy hitters”. Some of its major competitors include: Exxon Mobil, Royal Dutch Shell, BP and ConocoPhillips. The company’s largest competitor is Exxon Mobil, which is the world’s largest publicly traded international oil and gas company. Finding new energy resources (mostly oil) is a top priority for these oil giants. Through continuous exploration, and politics; private, public and government operated companies are being pressured to keep the supply high in order to meet consumer and business demand. “In Iraq’s southern desert, efforts to boost oil production have pushed the country’s dilapidated oil infrastructure to the brink. Rusted pipelines are running full and are in danger of rupturing on the floor of the Persian Gulf.
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Rickety pumps seize and spring leaks in the heat. The entire network meant to get oil from fields to tankers is maxed out and prone to backups that cause permanent damage to wells” (Davis 2011).
Companies such as Exxon Mobil have even established partnerships and joint-ventures with governments and foreign firms in order to open up new areas of land for exploration across the globe such as, Exxon completing a deal in the Arctic with a Russian oil giant. These aggressive strategies are a norm in this type of business. The petroleum and energy industry is a very high stake, high dollar industry that provides great profits for the companies involved. With this being said there will always be big companies and countries in the “Oil Wars” for limited energy resources.
Technology has to be considered in the strategy and overall success of Chevron. To continue being a market leader in the discovery, production and processing of energy resources, Chevron has to stay ahead of the industry with its technology by hiring the best engineers and IT staff as employees, consultants and advisors. These highly talented members help develop new technology and processes for Chevron. One new technology that is in common use around the world, but not yet in the U.S, is electromagnetic systems. “Reservoir monitoring is on the upswing, and we will probably see increased use of land-based MT arrays. The development of less expensive, portable EM systems with lower power consumption and flexible data processing options should increase industry interest.
EM technologies can be used to better define depth to basement, salt edges, statically correct seismic–all of which can reduce exploration risk–making them attractive to operators in tricky plays” (Rach 2011).
EM systems will allow Chevron to more easily survey land. This can also be a time saving and cost saving technology. Another technological improvement in the petroleum industry is the booming oil production from “tight formations” or areas that are impermeable. With oil exploration, companies try to make use of every resource they can find. Some resources are more easily attainable than others. The ability to extract oil from these formations was, in the past, extremely difficult to impossible. “Advances in horizontal drilling and hydraulic fracturing technologies have revolutionized North American gas markets and significantly boosted the region’s recoverable oil reserves. Moreover, the oil and gas production surge enabled by unlocking hydrocarbons production from ‘tight formations’ looks set to accelerate — with profound market and policy implications” (Oxford Analytica 2011).
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These are technologies and there implications that should be taken into consideration when analyzing the future growth and benefits of a proposed 10,000 shares purchase of Chevron stock. To keep its advantage in the upstream business, Chevron must develop and create its projects that offer significant returns compared to the initial investment. The company must be able to identify and act upon promising areas of exploration. This includes obtaining the rights, drill and process oil and gas successfully and efficiently but in a low-cost manner. It also has to renegotiate expiring contacts with domestic and foreign governments. The company has to keep in mind that political up-rest and also weather that can affect its businesses. After the deep water horizon rig fire in the Gulf of Mexico, Chevron has participated in many events that promote the improvement of industry standards and safety regulations. This strategy has been very profitable and successful.
Chevron also has a downstream (Improve returns and grow earnings across the value chain) advantage. This part of the company’s strategy involves the refining, manufacturing and marketing of products, which include gasoline. With higher profit margins in manufacturing and sale of gasoline, both the international and domestic aspects of the downstream strategy have increased in 2010 compared to 2009. These provide for positive outlooks for the advantages mentioned. With these advantages there are also disadvantages that must be accounted for with the Chevron strategy. The upstream earnings can be affected by industry wide price levels of oil and natural gas. There are many outside factors that affect these prices such as: worldwide economic conditions, demand and supply levels, and policies implemented by domestic and foreign governments, inclement weather and political unrest. Disadvantages in the downstream strategy are also a concern for Chevron.
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These earnings are closely related to margins on refining, manufacturing and marketing of products such as gasoline, jet fuel, etc. The ability for the company’s assets to be efficient and profitable is another disadvantage. Currency fluctuations and the repatriation of those funds are critical to profitability and Chevron’s earnings. If the value of a currency drops before it can be repatriated to U.S currency the change will cause a loss for the company. Inflation is another major concern for Chevron as well. The values of profits, when adjusted for inflation, provide a lessened “real” value of buying power. These advantages and disadvantages must be taken into account when the decision is made to purchase 10,000 shares of Chevron stock. The volatility of some of these factors is unpredictable and can cause great gains or losses for investors.
Liquidity Ratios
“Trends in a company’s liquidity position make it possible to use past and current information to help predict future liquidity. These measurements are often used to examine the company’s financial position and evaluate its ability to meet financial obligations” (Wertheim 1993).
There are specific trends that can be found using the past three years of liquidity information for Chevron and ExxonMobil. The first trend that stands out is that Chevron’s working capital is increasing each year. The working capital represents the operating liquidity for the company. Exxon has a declining trend in working capital. Chevron’s ability to pay short-term obligations is trending upward compared to Exxon’s downward trend, as indicated by the current ratio. The oil & gas industry is averaging a little less than Chevron at 0.9 for 2007-2008.
The company’s ability to cover short-term liabilities with short term assets (acid-test ratio) is on a continuous upward trend and Exxon’s is in a downward spiral. The industry average is at 0.7 (2007-2008), so Chevron is ahead of the pack. Chevron is also collecting quicker on accounts receivables as compared to Exxon but is a bit slower than the industry (4.2 2007-2008).
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Both company’s’ inventory turnover per year is about the same but faster than the industry, which is at 22.8 in the year 2007-2008. Long-Term Debt Paying Ability Ratios
“Traditional capital structure models suggest that firms have a target debt ratio, which results from a tradeoff between the benefits and costs of debt” (De Jonga 2010).
With this being said Chevron and many companies carefully analyze these long-term debt paying ratios in order to have a better understanding of liabilities that will affect future profits. The first ratio analyzed is the times interest earned ratio. This ratio provides an idea of the extent of which earnings are available to meet interest payments. Chevron meets these requirements with no problem. It has sufficient earnings to meet interest payments many times over. Exxon also has sufficient earnings to meet these interest payment obligations, but not to the extent of Chevron. A company’s debt ratio indicates what proportion of debt a company has relative to its assets (provides leverage and potential risks).
Chevron has a consistently lower debt ratio than Exxon and the industry average of .56 (2007-2008), indicating it has a larger proportion of assets than liabilities. The debt to equity ratio indicates that proportion of equity and debt it is using to finance its assets. There is a positive trend showing that Chevron has a lower debt to equity ratio resulting in the company financings its assets with a smaller proportion of equity as compared to Exxon and the industry which is averaging about 1.06 (2007-2008).
Finally, the debt to tangible net worth ratio provides an indication of how well a company will be able to borrow money to finance its growth in the future. It gives a clearer picture to analysts of the company’s hard (tangible) assets to liabilities. Once again, Chevron has an edge in this category as compared to Exxon’s balance sheet.
Profitability Ratios
The profitability of a business is another very important aspect that must be taken into account when deciding to invest in a company. Chevron has an advantage in net profit margin ratio in the year of 2010, which means 9.65% or 9 cents of every dollar in sales goes to profit compared to 8.74% or 8 cents per sales dollar for Exxon and the industry, which has a lower: 8.5% or 8 cents per sales dollar. The total asset turnover ratio is another good indicator of a company’s profitability. This asset management ratio measures the ability for the company to use its assets to generate sales. There is a trending pattern of being less efficient in asset management than Exxon in this aspect but being higher than the industry average. Return on assets is a good meter of how profitable a company is relative to total assets. Exxon has a higher ROA and Dupont ROA but Chevron is continually improving but still leading the industry average of 6.8 (ROA).
Cash Flow Ratio Analysis
It is critical to be able to understand the importance of Chevron’s cash flows compared to its competitors and the industry. Investors want to know about how much money comes into the company and what the company is using this cash on. “The cash flows are broken down into three activities: cash flows from operating activities, cash flows from investing activities and cash flows from financing activities” (Francis 2011).
The first ratio used in the analysis is the coverage ratio (operating cash flow/total debt).
This provides information of Chevron’s ability to pay total debt with operating cash flows during the cycle. Chevron has a higher trending average than Exxon and the industry averages showing strong cash flow available to pay total debt. Another ratio that is part of the cash flow analysis is the operating cash flow/cash dividends ratio. This provides investors’ insight on how many times the company is able to meet its cash dividend payments with its operating cash flow. This ability is close to Exxon but varies year to year.
Industry Specific Ratios
Industry standards are always the norm that oil and gas companies must keep up with. If a company is leading the industry in specific area it must try to keep this advantage and if a company is trailing in a certain area its management must implement a plan that will help it increase its rankings. One such ratio that must be kept up with is debt to capital ratio. It is basically a measurement of a company’s financial leverage. In the oil and gas industry for 2010 is averaging about 13.5%. Total liabilities to net worth is another ratio that compares total liabilities owed to the company’s total net worth. It is currently an industry average of 1.3, which indicates that companies have more liabilities than total net worth at this moment. This could be an indication that the companies rather spend borrowed money than their own cash during these tough economic times.
ROA or return on equity after taxes indicates the return on net income as a percentage of shareholder’s equity. It is useful to compare profitability between companies in the oil and gas industry, which is currently at 7.4%. There are many other ratios that can be taken into account when deciding on industry standards and comparing to any company. The analyst must be able to choose the most important data and ratios according to the decision at hand. Only the most pertinent data from the balance sheets, income statements and other financial statements and methods such as the successful-efforts method or full-costing method will be considered to make the best decision and ultimately increase shareholder wealth.
Comments on Material Information in F/S Footnotes
Footnotes can reveal a lot about a company. It can tell of pending legal matters, changes in inventory policy, etc. In note 2, Chevron acquired Atlas Energy, Inc for $4.47 billion in February of 2011. This move shows strength and industry growth. The company is always looking for new opportunities. In note 4, the company issued $1.25 billion and $350 million, in 2010 and 2009 of tax exempt bonds as a source of funds for refinery products in the United States. Chevron shows that it can raise money when needed without the need of banks. In note 9, long lived assets were written down to fair values of $57 million and $490 million, which resulted in before-tax losses of $85 million and $459 million. Chevron determined the fair values from internal models compared to discounted cash flows of other assets used by the company.
Chevron shows diversity in its portfolio of clients by stating that no single country accounted for 10 percent or more of the company’s total sales and other operating revenues in 2010, 2009 and 2008. This is a very powerful statement and provides investors certainty that if a client or country is lost it will not be detrimental to the company’s total sales. In note 12, Chevron shows that it has many different investments in countries around the globe. In note 14, on February 14, 2011, a court in Ecuador found Chevron guilty of environmental damage of $8.6 billion. Chevron expects to contest and appeal this judgment. This is very important because this can become a future liability that will affect earnings and future cash flows. In note 15, of the 2010 Chevron annual report, the company notifies the public that its effective tax rate decreased from 43.0 % (2009) to 40.3 % (2010).
This was motivated by an increase in tax credits and shows that the company will have more disposable income after taxes for future investment and research and development or company expansion. In note 19, the company shows the ability to capitalize (placed as an asset) $2.299 billion of exploratory costs on the balance sheet. This is a good accounting method because otherwise, those costs would have to be expensed and bring down net income. Another important note is that found in note 21. It shows the amount of employee incentive paid out of $766 million, $561 million and $757 million in 2010, 2009 and 2008. Incentive compensation is tied into company performance and individual performance and is paid out as cash bonuses. This will affect cash flows but retain top-performing representatives.
Value of Firm’s Stock Price and Prospects
A firm’s stock price and related information is critical to the evaluation of the company’s future prospects for investment. Ratios are another good source to aid in this evaluation. The first ratio used in our analysis is financial leverage. It can show to what degree a company uses fixed cost funds to create net income. The higher the leverage the higher the risk of default on payments. Chevron has been very close (tied) to its competitor Exxon around 1.00. The company also shows strength to investors with a higher EPS (earnings per share) as compared to industry giant, Exxon for the last three years. The P/E ratio helps to determine trends and expectation of earnings growth. This is one ratio that Chevron is trailing Exxon and the industry, but it shows positive each year.
Dividend yields are very important when investing. Chevron’s yield for the last 5 years has averaged 1.1 % higher than Exxon’s. This shows a higher return for investors. The peg ratio allows to fairly value a company at 1. Chevron has a lower peg ratio as compared to Exxon (1.38).
This is a more fairly valued growth rate of the P/E ratio. Analysts from different financial institutions have consistently upgraded CVX’s stock (downgraded in Oct.).
As for Exxon Mobil, analysts have downgraded the stock more often than Chevron. This is a key statistic because it shows a trend of the stock being overvalued or not performing as expected by analyst. Both companies have to keep up with emerging foreign companies such as Manitok Energy (Canadian), which has recent quarterly revenue growth of 171.50 %.
There are several positive outlooks for the oil and gas industry. According to Darren Campbell of Albertaoilmagazine.com, there will be large growth in unconventional gas, such as shale gas and tight gas in the future. Increased oil production will be needed in Middle Eastern areas that have been devastated by war. This will bring additional revenue for all involved and will help rebuild these areas. Research and development is the key component of the energy (oil & gas) sector. This is what keeps it thriving, because these are non-renewable sources of energy that need to be substituted or eliminated in the future as stocks dry up. The future earnings for these companies look to be overall positive as the demand for their products only increases as the world’s population and needs expand.
Conclusion
With all the evidence provided in this analysis; it is obvious that the recommendation to invest and purchase 10,000 shares of Chevron stock is in conclusion of this report. The company is not the largest if the “Big Oil” monopolies but is one of the most efficient in the many ratios in the study. With economy in a recession right not, oil and gas products will be needed to fuel growth not only in the U.S but in the rest of the world. There are large mergers of oil companies and also new territories being drilled, which means that as of now this industry is destined to grow and be able to meet
the consumer demand. Liquidity is essential when making a decision to invest in a company. As shown with working capital and other liquidity ratios, Chevron is a very strong and highly liquid company as compared to Exxon Mobil. Chevron has also proved that it has the ability to pay its short-term and long-term debt.
The company has a long-history of being very profitable for its shareholders and continues to be a leader in its industry. With such a strong and positive cash flow shown in its financial statements another aspect of the decision made to invest was influenced by this information. Continuous cash flow shows investors that the business collects on the money owed and has the ability to finance its own projects and pay dividends. Chevron also has had higher EPS and dividend yields as compared to the giant, Exxon Mobil. The company not only invests in other joint-ventures and countries abroad, it invests in its own future by research and development of high-tech ways to be more efficient and find new sources of energy. This company is without a doubt a profitable and stable company that will stand the test of time. These are the reasons why we should invest in Chevron Corp.
Works Cited
1. The Chevron Way. Chevron. 28 Aug. 2011 http://www.chevron.com/about/chevronway/ 2. 2010 Chevron Annual Report. Chevron. 31 Aug. 2011 http://www.chevron.com/documents/pdf/Chevron2010AnnualReport.pdf 3. 2010 Chevron-SEC 10K Filing. SEC. 31 Aug. 2011 http://www.sec.gov/Archives/edgar/data/93410/000095012311017688/f56670e10vk.htm#F56670201 4. MacDougall, Chris. “Fuel for portfolios: Exxon or Chevron?” MSN MoneyCenter . May 5, 2010. 31 Aug. 2011 http://articles.moneycentral.msn.com/learn-how-to-invest/fuel-for-portfolios-exxon-or-chevron.aspx 5. “Americas Oil and Gas Insight – September 2011.” Americas Oil and Gas Insight 1 Sep. 2011: ABI/INFORM Trade & Industry, ProQuest. Web. 3 Sep. 2011. 6. AARON C. DAVIS. “Iraqis pushing their oil production to the limit some fear industry leaders are being reckless.” Houston Chronicle 26 Jun 2011, ProQuest Newsstand, ProQuest. Web. 3 Sep. 2011. 7. Nina M.Rach. “What’s new in exploration.” World Oil 1 May 2011: ABI/INFORM Trade &
