Chevron: Buy for Huge Gains

Chevron (CVX) announced fourth quarter ended December 31, 2015 total revenue of $28.0 billion, down 33.5 percent year-over-year from $42.1 billion during the same period last year.

Chevron declared fourth quarter of 2015 net loss of $588 million or $0.31 of loss per diluted share, compared to a net income of $3.47 billion or $1.85 per diluted share in fourth quarter of 2014.

The key energy company reported continued decline in both its top and bottom lines primarily due to the ongoing weaker global commodity demand and pricing environment coupled with rising energy exploration costs, putting downward pressure on the company’s key margins.

Growth drivers  

Except for Iran, South America and North Africa all other OPEC countries including, Saudi Arabia, Iraq, West Africa and Other Middle East countries are projected to significantly grow their conventional liquid fuels production till the fiscal year 2035 compared to the key liquids productions recorded in 2008.
Going forward to 2016, the consolidated global revenue for net pumps markets is projected to grow at a CAGR of 3.7 percent over the 2009 till 2016 period which highlights the gradual recovery in the international commodity demand and pricing environment.

The combined demand for coal, oil and natural gas is observed to be exceeding the demand for other renewable and non-renewable sources of energy, primarily driven by notable growth in energy demand from the expanding world population and steady improvement in the people’s standard of living.

Moreover, the global energy demand is extremely diversified and spread across all major forms of energy with growing demand for renewable, ongoing dependability on hydrocarbons and expanding requirements for exhaustible crude oil and natural gas. The advanced fuel exploration and development technologies are believed to be at the center of this significant growth in production, superior environmental performance and unique cost competitiveness.

The international energy demand is forecasted to grow steadily and significantly despite currently weaker commodity demand and pricing environment which is estimated to somewhat benefit the margins of all downstream companies. Chevron being an integrated upstream and downstream company is expected to be cushioned by attractive growth in its downstream operations which were somewhat offset by a major decline in the company’s upstream operations owing to the continuing global slowdown in demand and pricing for all primary commodities including, energy.

A recovery in the cards  

The U-shaped market recovery from the current downturn matches closely with the global market recovery from the collapse of 2008-09 and its bottoming out has not still reached and currently counted 63 weeks as of now. However, the bottoming out of the recovery from the slowdown of 2008-09 took around 40 weeks and is estimated to be exhaustive but hindered U-shaped recovery.

Chevron’s various sources of cash for fourth quarter of 2015 includes $4.6 billion from operating cash flows, $2.7 billion of net debt issuance and $0.3 billion from non-core asset sales which is in total below the net usage of cash during the quarter and including, $7.4 billion of key capital expenditures, $2.0 billion for distributing dividends and $0.1 billion other cash usage. Therefore, the combined cash usage for the quarter exceeds the total sources of cash by $1.9 billion which is expected to enhance the company’s overall debt, making it a viable investment option only for long-term investors. In addition, the total source of cash worth $35.9 billion for complete fiscal year 2015 also exceeds the combined $37.8 billion of cash usage for the year by $1.9 billion.

The ongoing and extended global commodity demand and pricing downturn is estimated to bottom out much lower than the bottomed out point reached during the 2008-09 slowdown with steady recovery in Future’s market WTI oil price. The total cash usage for fourth quarter of 2015 and for this complete fiscal year is significantly exceeding the consolidated sources of cash for the company which is believed to force Chevron pay off the outstanding expenses by strategically issuing debt.

The Board of Directors at Chevron Corporation recently announced a quarterly dividend of $1.07 per share, payable March 10, 2016, to all the key stakeholders as of February 18, 2016 and in line with the company’s continued commitment towards delivering notable shareholder returns.

Going forward, Chevron has reaffirmed its long-term growth strategy and estimates to achieve nearly 20% LNG production increase by 2017 which is expected to be far better than any of its industry competitors. Crucially, Chevron’s latest production is projected to have notably better margins as against its current portfolio.

The long-term growth prospects for Chevron seems well-established being primarily supported by the company’s ongoing cost control initiatives while strategically investing in growing its LNG business and returning a majority of the invested capital to its key stakeholders in form of dividends and share repurchases.

Conclusion

Overall, the investors are advised to “Hold” their position in Chevron Corporation considering the company’s significant long-term growth prospects and currently overvalued stock with trailing P/E and forward P/E ratios of 36.04 and 18.83 respectively, compared to somewhat logical industry’s average P/E of 22.69.

The PEG ratio of -2.28 signifies no growth but decline compared to solid industry’s growth average of 0.67. The profit margin of 3.74% seems satisfactory. However, Chevron needs to optimize its debt-burdened balance sheet with significant total debt of $35.88 billion against weaker total cash position of $13.24 billion only, restricting the company to continue with its daily operations profitably.
Published on Mar 30, 2016
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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