Chevron Corporation

What began as the Pacific Coast Oil Company on September 10, 1879 in San Francisco transformed into what is now Chevron Corporation, recently ranked 8th among the world’s top oil companies by Petroleum Intelligence Weekly in 2011, second among US oil companies behind ExxonMobil.

The company has a market capitalization of over $204.9 billion. They have expanded into essentially every area of the energy industry, including exploring for, producing, and transporting crude oil and natural gas; refining, marketing, and distributing transportation fuels and lubricants; manufacturing and selling petrochemical products; generating power and producing geothermal energy; providing energy efficient solutions; and developing energy resources for the future, such as advanced biofuels.

In 2011, Chevron produced, on average, 2.673 million barrels of oil per day, 75% of which was done outside of the US. By the end of 2011, Chevron’s global refining capacity reached 1.96 million barrels of oil per day. They are the largest private producer of oil in Kazakhstan, oil and natural gas producer in Thailand, and overall oil producer in Indonesia. Currently, Chevron has numerous projects underway that will tap into new resources around the globe, including several offshore projects in Africa, Asia, and Europe. They are also involved with the development of the Athabasca Oil Sands project in Canada and the development of steam used to recover oil.

As mentioned, they have begun to explore unconventional energy resources including natural gas, oil sands, geothermal and solar energy, and biofuels. With the world’s attention slowly turning towards energy efficiency and with global demand for energy projected to grow by 36% by 2035 due to the expected population increase of 25% in the next 20 years, Chevron continues to search for more efficient and renewable resources and the development of efficient technologies with a budget of $32.7 billion for capital and exploratory projects for 2012.

In 2011, Chevron Corporation finished the year with $253.7 billion in revenues, an increase of 23.8% from 2010. They produced 2.673 thousand barrels per day of oil-equivalents, down 3% from the previous period due to normal field declines, maintenance-related downtime, and the impact f higher prices on entitlement volumes.

The decrease in production, however, was curbed due to the introduction of several major capital projects including the Perdido project in the U.S. Gulf of Mexico, the expansion in the Athabasca Oil Sands Project in Canada, the Frade Field in Brazil, and the Platong II natural gas project in Thailand, as well as the acquisition of Atlas Energy. Production is projected to increase to 2.680 million bpd by year-end 2012. Chevron also produced 1.849 thousand bpd of crude oil and natural gas liquids, down 3.8% from 2011, and 4.941 million cubic feet per day of natural gas, down 2% from 2011. At year-end 2011, Chevron was ranked sixth among the world’s top oil companies by Petroleum Intelligence Weekly based on 2010’s fiscal results.

Chevron has operations in 22 countries outside the U.S. in the Americas, Africa, Asia, Australia, and Europe. The firm benefits from having a well-diversified and fully integrated platform as they compete in both upstream and downstream operations and have several subsidiaries. Another strength is their history of generating sufficient cash to pay out dividends and cover capital and exploratory expenditures.

In 2011, they had a success rate in exploration wells of 70%, exceeding their 10-year average and one of the best success rates among their peers. In addition, over the past year, Chevron surpassed their competitors with a gross margin of $40.91 billion, compared to their peer group totaling just $24.7 billion in gross margin. Among them, Exxon Mobil finished the year with $29.61 billion in gross margin, and Conoco Phillips ended with a margin of $21.73 billion. This shows that Chevron is able to limit their costs, while maximizing their revenues.

Although Chevron shows many signs of growth with a strong balance sheet, diversification, and exploration success, they have some weaknesses that weigh down on their financial strength. One such weakness is the firm’s cash generation per employee compared to their peer group average, in which they are far behind the curve. Chevron ended the year with $4.26 billion of revenue generated per employee, while Exxon finished with $5.29 billion and Conoco with $8.43 billion. The peer average for 2011 was $8.67 billion per employee.

This reveals possible inefficiencies in their operations in terms of the number of workers they employ in relation to the amount of revenue they are able to generate. Return on investments is another area in which Chevron is lacking, though not as strongly as in revenues per employee. In

this case, Chevron is above their peer group average of 26.34%, sitting at 38.4% for 2011. While this number appears to be very strong, it is still behind the industry leader in ROI – Exxon Mobil with 44.11% for the year. Exxon Mobil has consistently outperformed Chevron in the past five years in this category, as well as revenue per employee. A weakness that is not as obvious from a financial statement analysis standpoint is that, for many years, Chevron has been falling short in the corporate responsibility sector, as the company has been sued multiple times for unethical practices including dumping their drilling waste in unlined pits of Ecuador and causing illness among residents of the surrounding area.

There are a variety of threats of which Chevron must be cognizant that may not only affect the firm, but the industry as a whole. Arguably, the biggest threat to the company and the oil industry is the volatility of commodity prices, in this case, the price of crude oil. There are many factors that influence the price of crude oil, including the general economic conditions, industry inventory levels, production quotas imposed by the Organization of Petroleum Exporting Countries (OPEC), weather-related damage and disruptions, competing fuel prices, and geopolitical risk.

Other threats to the performance of the company are governmental and/or regulatory changes. For instance, the concern for hydraulic fracturing practices may lead to legislation that will increase production costs or ban the process altogether, reducing their production. Lawsuits, such as the one discussed above, present another threat to the company and the industry as practices across the industry are under heavy scrutiny by the public and are, therefore, subjected to policy changes that could increase costs and reduce production on top of the high costs to the company of bringing these cases to court.

Amongst the threats that Chevron faces, the firm also has plenty of opportunities for growth in the near future. They are looking to expand further into the production of natural gas. In fact, they made several natural gas discoveries in 2011 off the coast of Australia.

One was made at their 50% owned and operated Orthrus Deep prospect, the others made by a 50% owned and operated Vos prospect and the 67% owned and operated Acme West prospect. Most recently, they discovered another natural gas reserve at their 50% owned and operated Satyr-3 prospect in January of this year. In addition to these discoveries, Chevron also completed their acquisition of Atlas Energy, Inc. during 2011.

This acquisition gives the company a good position in the Marcus and Utica Shales in the northeastern part of the U.S. as many companies are starting to focus more on drilling shale. During the year, Chevron also drilled their first shale gas wells in Poland and Canada, and completed an agreement to assess the shale wells in southern China.

These, among a plethora of other capital projects, will help Chevron continue to have sustained long-term production growth. Some of these projects include the Angola liquefied natural gas (LNG) project and the Usan deep-water development off the shore of Nigeria, which began production in 2012; and the Big Foot and Jack/St. Malo projects in the U.S. Gulf of Mexico that are expected to begin production in 2014; plus the projects mentioned in the first paragraph.

Over the next 3 years, Chevron is forecasted to grow at a rate of approximately 7.5%, however, in the long run, growth will level out to a constant rate of about 4%. In 2011, Chevron grew at the rate of 23.8% and at a rate of 19.4% in 2010. These high growth rates were due to the recession that hit the U.S. economy in 2008 that ultimately led to recoveries of higher-than-normal rates of growth for many firms closely correlated with the U.S. economy. Therefore, the company will start to see growth rates slow down as the recovery gradually levels out. The growth of the firm will eventually stabilize at around that of the U.S. GDP.

Along with the increase in revenues, Chevron’s profitability also soared in the past few years, as it too continues its recovery from 2008 financial crisis. Chevron’s return on equity finished at 23.8% in 2011, showing that the corporation has not yet fully recovered from pre-2008 levels as the firm’s ROE peaked in 2008 at 29.2%. Chevron’s peer group average ROE ended 2011 at 18.73%, communicating that Chevron performed well over the period. They are, however, behind one of their main competitors in terms of profitability – Exxon Mobil – who finished the year with an ROE of 27.3%. Overall, Chevron was ranked fifth among industry leaders in the return on equity category.

As mentioned above, Chevron, like most companies in the U.S., was affected by the financial crisis of 2008, hitting a five-year low stock price of $57.83 on October 6, 2008. Since then, the stock price has been gradually recovering. Between July of 2010 to April of 2011, investors’ prospects of the company escalated as Chevron’s stock price took a large leap from $67.31 to $109.66 per share due to two deep-water natural gas discoveries in their Gorgon and Wheatstone liquefied natural gas projects off the northwest coast of Australia in the Carnarvon Basin. From that time, growth in the price has leveled out, and was valued at $107.82 as of December 15, 2012.

The movement in stock price, mirrors what is seen in the growth of revenue over the past few periods as Chevron has seen high rates of growth post-financial crisis, but is starting to level off as the economic recovery is slowing down. There are several stock valuing methods that I used to analyze Chevron’s current stock price. One such method is called Free Cash Flow to Equity. By forecasting the financial statements out three years at a growth rate of 7.5%, I calculated the free cash flow to the firm for each year.

From those figures, I was able to find the present value of the corresponding free cash flows to equity. I also calculated the terminal cash flow to equity and its present value using a constant growth rate of 4%. The price that I valued the stock was the sum of these present values over the number of common shares outstanding, coming to $186.49 per share.

This value is much higher than the current price, due to the fact that Chevron’s forecasted growth rate was so close to the required return of 8.5%, causing the valuation to be skewed. Another method that I used to value the stock was the Gordon Growth Model that takes the sum of the present values of each forecasted year’s dividend and the terminal value. The stock was valued at $134.68. Again, this figure was skewed due to the closeness of the forecasted growth rate and required return. By conducting a sensitivity analysis, I found that, even if the growth rate were as high as 9% or as low as 6%, the stock’s intrinsic value was still well above the current price: $140.27 and $129.25, respectively.

The last method I used to value the stock was the Price-to-Earnings Model. This model took into account the company’s plowback ratio. With Chevron’s plowback ratio being unusually high, the intrinsic value of the stock was, again, skewed. I valued the stock to be $64.02. Since each model was distorted by at least one factor, the stock valuations were relatively unreliable.

Therefore, I had to base my analysis and recommendation off of the financial statement analysis and weigh the company’s strengths, weaknesses, opportunities, and threats. Overall, I would recommend a buy (or hold) strategy. Chevron is well positioned for strong growth in the future as they continue to take on a wide variety of capital projects in their well-diversified portfolio.

Sources: Garcia, Eduardo and Alexandra Valencia. “Ecuador plaintiffs to file lawsuit against Chevron in Argentina.” Reuters. October 31, 2012. <>.