Student Investment Fund Stock Report Chevron Corporation NYSE: CVX Analysts: Billie Jean Bergmann & Jacob Krause Recommendation: BUY Market Cap: $132.3 B Recent Price: $66.87 (05/01/09) Target Price: $79.11 Sector: Energy Sub Sector: Integrated Oil & Gas HIGHLIGHTS CVX is the world's largest producer of geothermal energy 1. CVX is diversifying their sources of energy in order to meet the world's growing demand in an environmentally sound way. CVX is diversified geographically with operations in over 0 countries worldwide. CVX s investment in new technology and renewable energy initiatives ensure future stability and growth in revenues and profits. CVX's efforts to protect the environment were recognized in 2008 with awards from the National Ocean Industries Association and the California Department of Oil, Gas and Geothermal Resources. INVESTMENT THESIS Growth in worldwide energy consumption is increasing the need to develop innovative sources of renewable energy and additional supplies of traditional energy. CVX is strategically positioned and diversified to meet the world s growing demand for renewable and traditional energy. CVX has a strong historical and projected dividend growth compared to its key competitors, evidenced by its steady and consistent growth in free cash flow per share and 21 consecutive years of growing dividends. ROA, ROE, and ROIC are all sufficiently high to ensure CVX remains on pace for shareholder value creation in the long term, even if the company s future operating environment becomes more challenging than it s been in the recent past. Our conservative model projects a relatively small spread between the ROIC and WACC, but one that is consistent with long term value creation. ONE YEAR PRICE PERFORMANCE CVX BUSINESS SUMMARY Chevron Corporation is one of the world's largest integrated energy companies. The company is headquartered in San Ramon, California and conducts business in more than 0 countries. CVX is engaged in every aspect of the crude oil and natural gas industry, including exploration and production, manufacturing, marketing and transportation, chemical manufacturing and sales, geothermal and power generation. CVX is a world leader in renewable energy investment and advanced energy technology. Chevron s commitment to technological development provides ways that help the business increase energy efficiency. CVX is taking steps to form partnerships to help improve the overall quality of life and health of people in emerging markets. S&P 500 CVX has outperformed the S&P 500 in the past year. FINANCIAL STATISTICS VS. SELECTED COMPETITORS & INDUSTRY Metric CVX XOM COP Industry S&P 500 ROA, 5 Yr. Avg. 13.5% 17.7% 5.8% 11.4% 8.4% ROE, 5 Yr. Avg. 26.4% 34.5%.6% 22.1% 20.4% ROIC, 5 Yr. Avg. 22.4% 25.4% 11.9% 15.1% 11.3% DPS, 2008 $2.52 $1.55 $1.87 FCF/share, 5 Yr. Avg. $3.67 $6.35 ($0.28) EPS, 2008 $11.72 $9.14 ($.42) 5 YR Insider Selling $262 M $432 M $96 M 1. A renewable resource that generates reliable power while producing virtually no greenhouse gas emissions.
Chevron Billie Jean Bergmann Jacob Krause MACROECONOMIC THESIS Worldwide energy consumption is projected to rise more than 50% by 2030, fueled by growth in the global population. Higher energy demand will be driven by rapid growth rates in emerging economies such as China and India, which will continue to develop into more energy hungry economies (similar to the United States and Europe). Energy demand will rise with economic output and improved standards of living, which in turn will put added pressure on energy supplies. As economies become increasingly industrialized they drive their cars more each year and live in houses that are equipped with an increasing array of energy demanding appliances, computers and other conveniences. The combined aspects listed above will lead to an increase in the need to develop innovative, renewable energy sources and additional supplies of traditional energy. Even if the use of renewable energy supplies double or triple over the next 25 years, the world will still depend on fossil fuels for as much as 85% of its energy needs. (Projections reported by the National Petroleum Council) President Obama s plan to cut $35 billion in U.S. oil preferences over the next years will have little effect on Chevron s revenues due to the company s geographic diversification and strategic positioning, which is further discussed below in the global presence section. BUSINESS SEGMENTS CVX's Upstream segment (26.9% of 2008 total sales revenue) includes the exploration, production and sale of crude oil and natural gas. Earnings for the upstream segment closely follow industry price levels for crude oil and natural gas. Crude oil and natural gas prices are subject to external factors over which the company has no control, including product supply and demand connected with global economic conditions and industry inventory levels. Besides the impact of the fluctuation in prices for crude oil and natural gas, the longer term trend in earnings for the upstream segment is also a function of other factors, including the company s ability to find, acquire and efficiently produce crude oil and natural gas; changes in fiscal terms of contracts; changes in tax rates on income; and the cost of goods and services. The United States accounted for 46.9% of upstream sales revenues in 2008; whereas, international sales accounted for 53.1% of upstream revenues. CVX's Downstream segment (71.8% of 2008 total sales revenues) includes refining and marketing of petroleum products and other products derived from crude oil. Additionally, it includes the transportation of products. Earnings for the downstream segment are closely tied to margins on the refining and marketing of products such as gasoline, diesel and jet fuel, lubricants, fuel oil and feedstock for chemical manufacturing.
Chevron Billie Jean Bergmann Jacob Krause The energy industry's margins are often volatile, and can be affected by the global and regional supply and demand balance for refined products and by changes in the price of crude oil used for refinery feedstock. Industry margins can also be influenced by refined product inventory levels, geopolitical events, refinery maintenance programs and disruptions at refineries resulting from unplanned outages due to severe weather or other operational events. Other factors affecting profitability for downstream operations include the reliability and efficiency of CVX s refining and marketing network, the effectiveness of the crude oil and product supply functions and the economic returns on invested capital. Profitability can also be affected by the volatility of tanker charter rates for the company s shipping operations, which are driven by the industry s demand for crude oil and product tankers. Other factors beyond the company s control include the general level of inflation and energy costs to operate the company s refinery and distribution network. The company s most significant marketing areas are the West Coast of North America, the U.S. Gulf Coast, Latin America, Asia, Southern Africa and the United Kingdom. In 2008, 42.2% of downstream sales revenues were based in the United States with international sales accounting for 57.8% of downstream sales revenues. CVX's Chemicals segment (0.7% of 2008 total sales revenues) includes the manufacture and sale of additives for lubricants and fuel. Chevron s 50 50 joint venture, Chevron Phillips Chemical Company LLC, is one of the world s leading manufacturers of commodity petrochemicals. Chevron Oronite markets more than 500 performances enhancing products and supplies, which is ¼ of the world s fuel and lubricant additives. Earnings in the petrochemicals business are closely tied to global chemical demand, industry inventory levels and plant capacity utilization. Feedstock and fuel costs, which tend to follow crude oil and natural gas price movements, also influence earnings in this segment. In 2008, United States sales accounted for 26.4% of sales revenues in CVX s chemicals segments, with 73.6% of the sales revenues driven by international markets. CVX's Other Businesses segment (0.6% of 2008 total sales revenues) includes coal mining operations, power generation businesses, insurance operations, real estate activities and technology companies. 95.3% of the other businesses revenues were based in the United States; 4.7% of the sales revenues were international. Chemicals FY2008 Sales $2.17B 0.7% of Total Sales.8% Growth from 2007 Other Business FY2008 Sales $1.82B 0.6% of Total Sales 13.1% Growth from 2007 Downstream FY2008 Sales $219.94B 71.8% of Total Sales 23.4% Growth from 2007 Upstream FY2008 Sales $82.32B 26.9% of Total Sales 26.2% Growth from 2007
Chevron Billie Jean Bergmann Jacob Krause GLOBAL PRESENCE Chevron has an impressive diversified portfolio with key operations in important oil and gas regions, as well as geothermal interests in Indonesia and the Philippines. Diversification into renewable energy helps shield against possible losses caused by traditional energy price movements, new legislation and losses of traditional energy reserves. Furthermore, investment in renewable energy resources ensures Chevron will remain an industry leader in the future. The map below show how geographically diversified Chevron s production is. The graph highlights the main countries in which Chevron has upstream operations, exploring, producing and selling crude oil and/or natural gas. In addition to the upstream interests depicted on the above map, Chevron has downstream, chemical and renewable operations in over 0 countries worldwide. Broad geographic diversification buffers against possible losses due to regional civil unrest, natural disasters and war. In 2008 56.4% of total revenues were international and 43.6% of total revenues were domestic. Other than the United States, no single country accounted for % or more of the company s total sales and other operating revenues in 2008.
Chevron Billie Jean Bergmann Jacob Krause VALUATION Our valuation model analyzes CVX's historical financials (2004 2008) and explicitly forecasts all income statement and balance sheet items as a percent of sales over a year horizon (model shown in appendix). Using conservative assumptions, a discounted cash flow (DCF) model suggests that CVX is slightly undervalued. The model returns a fair value of $79.11 for 2009 and supports a 12 month target price of $86.61. CVX s closing price on May 01, 2009 was $66.87. Our model suggests that CVX s DCF price could grow as high as $169.81 by 2018 (11.05% annual returns, in addition to the stock's 3.9% dividend yield). Inputs: Revenue growth is modeled on a year by year basis to better reflect CVX s prospects (see technical appendix). Despite CVX s historical 5 year growth rate average of 15.1%, the revenue growth forecast we used forecasted a decline in energy demand due to the global economic downturn and the volatility of prices in the industry. Our average year projected growth rate is therefore a conservative 5.26%. Revenues are projected to grow 30% in 2009, % in 20, 6.5% in 2011, 6% in 2012, 5.5% in 2013, 5% in 2014, 4.5% in 2015, 4% in 2016 and then taper off to a long term sustainable rate of 3% in 2017 and beyond. Our long term forecasted growth rate of 3% is significantly more conservative than Thomson Reuters and the analysts' consensus, both of whom project a long term growth of 7%. Cost of Goods Sold was conservatively forecasted to be slightly higher than the 5 year average of 74%, contrary to the historical decline in COGS and further predicted decline in costs (Argus Research). Our forecast assumes that higher input costs will accompany the global economic recovery. Other Operating Expenses are adjusted 0.3% higher from the historical average. CVX has a historical trend of slightly increasing other expenses. By adjusting the expenses above the historical average to 7.2% our forecast continues a trend that offsets future increases in operating expenses. Share Growth/Diluted Share Growth is set at 3.0%, which is lower than the historical average of 0.9%. CVX has historically bought back shares, as represented in the negative historical average. The 3.0%% rate ensures that earnings per share and intrinsic value per share are modeled conservatively. Dividend growth is adjusted down 0.4% from the historical average. CVX has a recent trend of a slower dividend growth. The 12.0% dividend growth rate reflects CVX's historical commitment to growing dividends faster than peer firms such as Exxon Mobil and Conoco Phillips. Net Property Plant and Equipment is modeled on a year by year basis to better reflect CVX s net PPE as a percent of sales. We anticipate that future exploration of oil will be more capital intensive. Therefore, we based our PPE projections off of historic growth in PPE/Sales. The historic growth from 2005 2008 in PPE/Sales is 13.0%. To keep our model conservative and account for the impact the projected 30.0% revenue growth in 2009 had on PPE/Sales we projected a 7.0% increase in Net PPE year by year out to 2015. Forecasted year by year PPE/Sales, 51.39% in 2009, 49.99% in 20, 50.22% in 2001, 50.70% in 2012, 51.42% in 2013, 52.40% in 2014, 52.50% in 2015 and 2016, and holding the PPE/Sales at 53.00% in 2017 and 2018. The historical average of 32.5% compared to the forecasted average of 51.71% shows our large increase in Net PPE.
Chevron Billie Jean Bergmann Jacob Krause Cash is modeled slightly higher than the historical average. Although CVX s cash/sales have been decreasing, we increased the cash to help keep our model conservative and compress forecasted ROIC. Receivables are modeled slightly lower than the historical average. CVX s receivables/sales have declined significantly recently from.2% in 2007 to 5.8% in 2008. CVX is reducing the amount held in receivables; therefore, we forecasted receivables/sales lower than the historical average. WACC and Beta. The model uses a WACC at.40%. Our estimates of CVX's historical beta vs. the S&P 500 was 0.84. We used a much higher beta of 1.15 to allow for reversion to the mean and possible increases in the volatility of CVX s stock price. The higher beta increases the cost of capital, which compresses the value of the stock price. The cost of capital was calculated using a risk free rate of 4%, which is higher than the current rate of 2.75%, and market risk premium of 6%. PROFITABILITY Margins. The forecast model projects no growth in margins over the year forecast period. This helps to compensate for some of the current economic uncertainty. CVX has shown average Gross, Operating and Net Profit Margins for 2004 2008 of 27.9%, 14.5%, and 8.4%, respectively. When we employ conservative forecasting assumptions the average forecasted margins compress to 26% for Gross Margins, 12.3% for Operating Margins and 7.1% for Net Profit Margins. 35% 30% 25% 20% 15% % 5% 0% Gross Margin Operating Margin Net Margin Dividends Per Share. One of the key factors in choosing a mega oil stock was the ability of a company to grow its dividends. CVX s potential to grow DPS is substantially better than its key competitors due to CVX s ability to steadily and consistently grow their FCF per share. Even with conservative assumptions, CVX has the ability to grow its dividend as high as $ per share in the long term, whereas their key competitors cannot, which benefits the tax free status of the student investment fund. $.00 $8.00 $6.00 $4.00 $2.00 $0.00 Dividends Per Share Historical Avg Forecasted Avg $2.01 $6.04 XOM CVX COP
Chevron Billie Jean Bergmann Jacob Krause Free Cash Flow Per Share. The stability in FCF per share supports CVX s ability to grow its dividends. XOM s FCF/Share is higher historically, and COP s has the chance to be higher in the future, but CVX s FCF/Share has undeniable stability that suits our selection criteria for a big oil stock, as shown in the historic average of $3.67 per share and forecasted average of $6.46 per share. $20 $15 $ $5 $0 ($5) ($) Free Cash Flow Per Share Historical Avg Forecasted Avg $3.67 $6.46 XOM CVX COP Return on Assets, Return on Equity and Return on Invested Capital. CVX has earned strong and sustainable ROA, ROE and ROIC for 2004 2008, with an average of 13.5%, 26.4%, and 22.4%, respectively. In employing conservative forecasting assumptions, these metrics compress to 13 14% for ROE and ROIC and 9% for ROA. The forecasted averages are all sufficiently high enough to 35% 30% 25% 20% 15% % 5% 0% ensure CVX remains on pace for shareholder value creation in the long term, even if the company s future operating environment becomes more challenging than it s been in the recent past. Historical Avg Forecasted Avg ROA 13.5% 8.8% ROE 26.4% 13.7% ROA 22.4% 12.9% Return on Assets Return on Equity Return on Invested Capital
Chevron Billie Jean Bergmann Jacob Krause VALUE CREATION METRICS Net Operating Profit After Tax and Free Cash Flow. Historically, NOPAT and FCF both have steadily increased. In employing conservative modeling assumptions, the forecasted NOPAT and FCF drop far below their steadily increasing historic trend. Yet, CVX is still a compelling stock and has the potential to continue increasing NOPAT and FCF in the long run. Their FCF is increasing at a much lower rate than NOPAT due to the offset of higher PPE/Sales assumption discussed earlier. Both NOPAT and FCF depict CVX s ability to enhance shareholder value through generating steady free cash flow. NOPAT and Free Cash Flow $30,000 $25,000 $20,000 $15,000 $,000 $5,000 $0 NOPAT and Free Cash Flow (millions) vs. DCF Price $220.00 $170.00 $120.00 $70.00 $20.00 $30.00 NOPAT Free Cash Flow DCF Price DCF Price ROIC v. WACC value spread. Comparing a company's ROIC to its cost of capital reveals whether they are increasing the value of invested capital. Historically, CVX s growing ROIC to WACC spread has been a key value driver. There are signs this will continue in the future. 30% 25% 20% Although our conservative modeling 15% assumptions compress the spread by % approximately %, CVX maintains a positive ROIC to WACC spread, suggesting the firm will continue to create shareholder value. 5% 0% Value Spread Economic Value Added and Market Value Added. Even with a compressed ROIC to WACC spread, CVX has significant potential to continue their trend of creating value for shareholders as shown through EVA and MVA. The large decrease in EVA is contributed to the revenue growth predictions mentioned earlier. In 2008 CVX created $13.7 billion of economic value. After the decline in 2009 we forecast a constant EVA overtime. The EVA is projected to grow from $2.7 billion in 2009 to $3.8 billion in 2018. Economic Value Added Return on Invested Capital WACC $15,000 $0,000 $13,000 $90,000 $11,000 $80,000 $9,000 $70,000 $7,000 $60,000 $5,000 $3,000 $50,000 $1,000 $40,000 ($1,000) $30,000 Economic Value Added Market Value Added Market Value Added
Chevron Billie Jean Bergmann Jacob Krause CVX had a MVA of $61.2 billion in 2008. Our projections show steady increase overtime from $63.1 billion to $92.8 billion. This evidences CVX s ability to create value for the market beyond the value of contributed capital as Chevron effectively controls and manages its assets. RELATIVE VALUATION We do not just rely on one valuation metric to measure the intrinsic market value of price. We also look at the historic valuation multiples which include: o Price/Sales o Price/EBITDA o Enterprise Value/EBITDA o Price/Earnings We compressed the historic multiples and compare forecasted multiple prices Forecasted Value Per Share $180 $170 $160 $150 $140 $130 $120 $1 $0 $90 $80 $70 $60 $50 $40 $30 $20 Forecasted Per Share Stock Values Low Price DCF Price High Price to our estimated DCF valuation. Our DCF price tracks closer to the extrapolated multiples prices, which shows the DCF share price is consistent with the multiples value estimates, which often reflects the market price. Current Price/Earnings, Price/Sales, Enterprise Value/EBITDA and Price/Book indicated that CVX is priced at a slightly lower premium compared to XOM, suggesting favorable relative valuation Relative Valuation P/E Ratio Price/Sales Value/EBITDA Price/Book CVX 6.53 0.57 2.97 1.54 XOM 8.94 0.88 4.17 2.93 COP 5.26 0.34 17.02 Industry 6.60 0.63 1.59 compared to competitors and the industry. INSIDER SELLING An additional metric we look at is the pattern of net insider purchases/sales. We prefer companies where executives are heavily invested in their own stock. The net insider selling strongly favors CVX over XOM. Since 2004, XOM's insiders have divested roughly $432 million, whereas CVX's insiders have divested only $262 million. Net Insider Transactions $0 ($75,000) ($150,000) ($225,000) ($300,000) ($375,000) ($450,000) ($525,000) Net Insider Purchases (Sales), $, in thousands XOM CVX
Chevron Billie Jean Bergmann Jacob Krause RISKS There is no stock in the current environment where everything is positive. Some risks we are concerned with include: Governmental policies regulating how companies are structured and where and how companies conduct their operations and formulate their products, which could hinder CVX s ability to outperform their competitors. Government imposed price controls on refined products such as gasoline or diesel fuel could have an adverse effect on the operations of CVX. Strained relations between the government and CVX may also impact the company s operations. Change in prices, which are generally determined by the supply and demand of oil could adversely impact operations. OPEC production levels are the major factor in determining worldwide supply of oil. Demand driven by the condition of local, national, and global economies, weather patterns and taxation relative to other energy sources can have an adverse effect on the price of oil. A longer recession than forecasted could continue to put downward pressure on oil and gas prices. Production and distribution disruptions from either natural or human causes could have an adverse effect on the operations of CVX. Hurricanes, floods, fire, earthquakes, and other forms of severe weather would impact CVX s ability to generate future revenues. Additionally, war, civil unrests, acts of violence, and other political events could adversely impact CVX s operations. If Chevron is not successful in replacing the crude oil and natural gas it produces with good prospects for future production, the company s business will decline. Creating and maintaining new projects depends on many factors including: obtaining and renewing rights to explore, developing and producing hydrocarbons, drilling success, ability to bring long lead time, capital intensive projects to completion on budget and schedule, and efficient and profitable operation of mature properties. Activities that could result in liability, either as a result of an accidental, unlawful discharge or as a result of new conclusions on the effects of the company s operations on human health or the environment. Regulation of greenhouse gas emissions could increase CVX s operational costs and reduce the demand for CVX s products. The risk we are most concerned with is an ongoing environmental damage lawsuit filed by Ecuador. Chevron management cannot currently estimate a range of possible loss from the case, but believes the case lacks legal and factual merit and plans to fight it. Chevron has also recently hired William Jim Haynes II, who ran one of the largest law departments in the U.S. federal government. We feel the addition of his world class legal talent and leadership will ensure minimal loss to the company.
Chevron Billie Jean Bergmann Jacob Krause OWNERSHIP CVX s institutional & mutual fund ownership is 64%. Top holders summarized below. TOP INSTITUTIONAL HOLDERS Holder Shares % Out Value Reported STATE STREET CORPORATION 3,764,672 5.18 $7.68 B 31-Dec-08 Barclays Global Investors UK Holdings Ltd 84,863,132 4.23 $6.28 B 31-Dec-08 VANGUARD GROUP, INC. (THE) 67,001,647 3.34 $4.96 B 31-Dec-08 Capital World Investors 57,122,806 2.85 $4.23 B 31-Dec-08 AXA 47,709,066 2.38 $3.53 B 31-Dec-08 FMR LLC 39,225,546 1.96 $2.90 B 31-Dec-08 Capital Research Global Investors 36,181,589 1.8 $2.68 B 31-Dec-08 Bank of New York Mellon Corporation 30,293,763 1.51 $2.24 B 31-Dec-08 WELLINGTON MANAGEMENT COMPANY, LLP 28,269,935 1.41 $2.09 B 31-Dec-08 NORTHERN TRUST CORPORATION 25,520,500 1.27 $1.89 B 31-Dec-08 TOP MUTUAL FUND HOLDERS Holder Shares % Out Value Reported WASHINGTON MUTUAL INVESTORS FUND 27,846,800 1.39 $2.06 B 31-Dec-08 VANGUARD 500 INDEX FUND 19,224,064 0.96 $1.42 B 31-Dec-08 SPDR TRUST SERIES 1 18,764,198 0.94 $1.55 B 30-Sep-08 VANGUARD TOTAL STOCK MARKET INDEX FUND 17,375,518 0.87 $1.29 B 31-Dec-08 INVESTMENT COMPANY OF AMERICA 13,572,278 0.68 $1.00 B 31-Dec-08 INCOME FUND OF AMERICA INC 12,885,000 0.64 $953 M 31-Dec-08 VANGUARD INSTITUTIONAL INDEX FUND 12,604,863 0.63 $932 M 31-Dec-08 AMERICAN BALANCED FUND 11,900,000 0.59 $880 M 31-Dec-08 COLLEGE RETIREMENT EQUITIES FUND,960,852 0.55 $811 M 31-Dec-08 VANGUARD/WELLINGTON FUND INC.,1,200 0.5 $799 M 30-Nov-08 SHORT SELLING TRENDS IN CVX STOCK CVX s downward trending days to cover indicates a general positive sentiment towards the stock. The short sellers have not set their sights on CVX throughout the economic downturn. If anything, CVX's days to cover ratio exhibits a slight downward trend. Days to Cover Ratio 14 12 8 6 4 2 0 Days to Cover Ratio (Short Interest Volume) Days to Cover
Chevron Billie Jean Bergmann Jacob Krause OTHER VALUATION MEASURES Piotroski s Financial Fitness Scorecard Piotroski s Financial Fitness Scorecard gives a company a maximum of 11 points based on items on the income statement and balance sheet. Historically, CVX s scored an average 8 out of the 11. The forecasted average scored an average of 9 out of 11, which indicates we are projecting CVX to become more financially stable. Altman s Probability of Bankruptcy Test The Altman Z Score uses eight different variables from a company s income statement and balance sheet to predict a company s probability of failure. In 2008, CVX scored a 4.55 indicating the company is well above the safe zone and should not go bankrupt in the near future. Analysts' Consensus Recommendations If analysts' recommendations were ranked on a scale of 1 to 5, 1 being a strong buy and 5 being a strong sell, CVX's mean recommendation would have averaged a steady 2.2 for the past two weeks indicating a buy, but not a strong buy, signal from analysts. Graham and Dodd Relative Valuation Graham and Dodd is a Thomson Reuters relative valuation metric. It measures the premium investors are paying for future earnings compared to all stocks in the S&P 500. CVX ranked in the 5 th Decile of Graham and Dodd, indicating the stock sells for an average premium, and is not overvalued.
Chevron Billie Jean Bergmann Jacob Krause Earnings Momentum When we began screening for stocks one of the criteria was for the company to have convincing earnings momentum, because growing profits in the current economic environment would be a sign of even stronger prospects when the global economy eventually recovers. CVX has better earnings momentum than 82% of the stocks in the S&P 500. Based on our forecasts, this strong earnings momentum is likely to continue. RECOMMENDATION: BUY We believe every portfolio has a place for a big energy stock. We like CVX in terms of its relative and discounted cash flow valuation, strong dividend per share growth, ability to create shareholder value and financial stability: CVX is undervalued at its current price of $66.87 (05/01/2009), compared to our conservative DCF valuation of $79.11. CVX s has strong historical and projected DPS growth compared to its key competitors, evidenced by its steady and consistent growth in FCF per share and 21 consecutive years of growing dividends. ROA, ROE, and ROIC are all sufficiently high enough to ensure CVX remains on pace for shareholder value creation in the long term, even if the company s future operating environment becomes more challenging than it s been in the recent past. Our conservative model projects a relatively small spread between the ROIC and WACC, CVX is still able to create value, as evidenced by its increasing EVA and MVA. CVX s proven financial stability, evidenced by Piotroski s Financial Fitness Scorecard, Altman s Probability of Bankruptcy test, NOPAT and FCF. The growth in worldwide energy consumption will lead to an increase in the need to develop innovate, renewable energy and develop additional supplies of traditional energy. CVX is strategically positioned through diversification to meet the world s growing demand in renewable and traditional energy.
CVX Valuation & Analysis Model Page 1 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 A B C D E F G H I J K L M N Forecasted income statement items are based on 5 years of historical average ratios unless a value is entered in Enter Firm Ticker CVX the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future. Enter first financial statement year in cell B6 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Average Manual Total revenue 155,300 198,200 2,118 220,904 273,005 Revenue Growth 27.6% 6.0% 5.1% 23.6% 15.1% Cost of goods sold 114,237 148,750 149,034 155,575 192,700 COGS % of Sales 73.6% 75.1% 70.9% 70.4% 70.6% 72.1% 74.0% Gross profit 41,063 49,450 61,084 65,329 80,305 SG&A expense 4,557 4,828 5,093 5,841 5,734 SG&A % of Sales 2.9% 2.4% 2.4% 2.6% 2.1% 2.5% Research & Development 697 743 1,364 1,323 1,169 R&D % of Sales 0.4% 0.4% 0.6% 0.6% 0.4% 0.5% Depreciation/Amortization 4,935 5,913 7,506 8,708 9,528 D&A % of Sales 3.2% 3.0% 3.6% 3.9% 3.5% 3.4% Interest expense (income), operating 0 0 0 0 0 Inc. Exp. Oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Non-recurring expenses 0 0 0 85 22 Exp. Non-rec 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other operating expenses 9,832 12,191 14,624 16,932 20,795 Other exp. 6.3% 6.2% 7.0% 7.7% 7.6% 6.9% 7.2% Operating Income 21,042 25,775 32,497 32,440 43,057 Interest income (expense), non-operating 0 0 0 0 0 Int. inc. non-oper. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Gain (loss) on sale of assets 0 0 0 0 0 Gain (loss) asset sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other income, net 0 0 0 0 0 Other income, net 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Income before tax 21,042 25,775 32,497 32,440 43,057 Income tax 7,517 11,098 14,838 13,479 19,026 Tax rate 35.7% 43.1% 45.7% 41.6% 44.2% 42.0% Income after tax 13,525 14,677 17,659 18,961 24,031 Minority interest 0 0 0 0 0 Minority interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Equity in affiliates 0 0 0 0 0 Equity in affiliates 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% U.S. GAAP adjustment 0 0 0 0 0 U.S. GAAP adjust. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net income before extraordinary items 13,525 14,677 17,659 18,961 24,031 Extraordinary items, total 294 0 0 0 0 Extrordinary items Too unpredictable to forecast, set to zero in the forecast Net income 13,819 14,677 17,659 18,961 24,031 Total adjustments to net income 3 2 1 0 0 Adjustments to NI Too unpredictable to forecast, set to zero in the forecast Basic weighted average shares 2,116 2,144 2,186 2,118 2,038 Share growth 1.3% 1.9% -3.1% -3.8% -0.9% -3.0% Basic EPS excluding extraordinary items 6.39 6.85 8.08 8.95 11.79 Basic EPS including extraordinary items 6.53 6.85 8.08 8.95 11.79 Diluted weighted average shares 2,122 2,155 2,197 2,132 2,050 Diluted share growth 1.6% 2.0% -3.0% -3.8% -0.9% -3.0% Diluted EPS excluding extraordinary items 6.37 6.81 8.04 8.90 11.72 Diluted EPS including extraordinary items 6.51 6.81 8.04 8.90 11.72 Dividends per share -- common stock 1.53 1.76 2.01 2.26 2.53 Gross dividends -- common stock 3,236 3,778 4,396 4,791 5,162 Dividend growth 16.7% 16.4% 9.0% 7.7% 12.4% 12.0% Retained earnings,583,899 13,263 14,170 18,869 Data Source: Thomson/Reuters values in millions Historical Income Statements Forecasting Percentages
CVX Valuation & Analysis Model Page 2 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 O P Q R S T U V W X Y Z Revenues grow at the same rate each year unless a growth value is manually entered in the cell above the forecast year, in which case the year-by-year value overrides the historical or manual average. It makes sense to start tapering the growth forecasts 5 or 6 years into the forecast period. Year-by-year revenue growth -30.00%.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.00% 3.00% Forecasted Income Statements -- Years year 2009E 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Total revenue 191,4 2,214 223,878 237,3 250,362 262,881 274,7 285,699 294,270 303,098 Cost of goods sold 141,417 155,558 165,670 175,6 185,268 194,532 203,286 211,417 217,760 224,292 Gross profit 49,687 54,656 58,208 61,701 65,094 68,349 71,425 74,282 76,5 78,805 SG&A expense 4,792 5,272 5,614 5,951 6,278 6,592 6,889 7,165 7,379 7,601 Research & Development 955 1,051 1,119 1,187 1,252 1,314 1,374 1,428 1,471 1,515 Depreciation/Amortization 6,561 7,217 7,686 8,147 8,595 9,025 9,431 9,808,2,406 Interest expense (income), operating 0 0 0 0 0 0 0 0 0 0 Non-recurring expenses 18 20 21 22 23 24 26 27 27 28 Other operating expenses 13,759 15,135 16,119 17,086 18,026 18,927 19,779 20,570 21,187 21,823 Operating Income 23,601 25,961 27,649 29,308 30,920 32,466 33,926 35,284 36,342 37,432 Interest income (expense), non-operating (558) (5) (467) (448) (462) (523) (457) (379) (361) (330) Gain (loss) on sale of assets 0 0 0 0 0 0 0 0 0 0 Other income, net 0 0 0 0 0 0 0 0 0 0 Income before tax 23,043 25,451 27,182 28,860 30,457 31,942 33,469 34,905 35,981 37,2 Income tax 9,686,699 11,426 12,131 12,803 13,427 14,069 14,672 15,125 15,596 Income after tax 13,357 14,753 15,756 16,728 17,654 18,515 19,400 20,232 20,856 21,506 Minority interest 0 0 0 0 0 0 0 0 0 0 Equity in affiliates 0 0 0 0 0 0 0 0 0 0 U.S. GAAP adjustment 0 0 0 0 0 0 0 0 0 0 Net income before extraordinary items 13,357 14,753 15,756 16,728 17,654 18,515 19,400 20,232 20,856 21,506 Extraordinary items, total 0 0 0 0 0 0 0 0 0 0 Net income 13,357 14,753 15,756 16,728 17,654 18,515 19,400 20,232 20,856 21,506 Total adjustments to net income 0 0 0 0 0 0 0 0 0 0 Basic weighted average shares 1,977 1,918 1,860 1,804 1,750 1,698 1,647 1,597 1,549 1,503 Basic EPS excluding extraordinary items 6.76 7.69 8.47 9.27.09.91 11.78 12.67 13.46 14.31 Basic EPS including extraordinary items 6.76 7.69 8.47 9.27.09.91 11.78 12.67 13.46 14.31 Diluted weighted average shares 1,989 1,929 1,871 1,815 1,760 1,708 1,656 1,607 1,558 1,512 Diluted EPS excluding extraordinary items 6.72 7.65 8.42 9.22.03.84 11.71 12.59 13.38 14.23 Diluted EPS including extraordinary items 6.72 7.65 8.42 9.22.03.84 11.71 12.59 13.38 14.23 Dividends per share -- common stock 2.92 3.38 3.90 4.50 5.20 6.00 6.93 8.00 9.24.67 Gross dividends -- common stock 5,781 6,475 7,252 8,123 9,097,189 11,412 12,781 14,315 16,032 Retained earnings 7,575 8,277 8,503 8,606 8,557 8,326 7,989 7,451 6,542 5,474
CVX Valuation & Analysis Model Page 3 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 AA AB AC AD AE AF AG AH AI AJ AK AL AM AN Enter Firm Ticker CVX Forecasted balance sheet items are based on 5 years of historical average ratios unless a value is entered in the manual cell, in which case the manual entry overrides the historical average. The idea is to consider whether the historical average is truly representative of what the firm can achieve in the future. values in millions Historical Balance Sheets Forecasting Percentages year 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Average Manual Assets PPE Growth 43.3% 8.1% 14.2% 16.8% 13.0% Cash & equivalents 9,291,043,493 7,362 9,347 Cash % of Sales 6.0% 5.1% 5.0% 3.3% 3.4% 4.6% 5.5% Short term investments 1,451 1,1 953 732 213 ST Invest. % of Sales 0.9% 0.6% 0.5% 0.3% 0.1% 0.5% Receivables, total 12,429 17,184 17,628 22,446 15,856 Receivables % Sales 8.0% 8.7% 8.4%.2% 5.8% 8.2% 6.0% Inventory, total 2,983 4,121 4,656 5,3 6,854 Inventory % of Sales 1.9% 2.1% 2.2% 2.4% 2.5% 2.2% Prepaid expenses 2,349 1,887 2,574 3,527 4,200 Pre. Exp. % of Sales 1.5% 1.0% 1.2% 1.6% 1.5% 1.4% Other current assets, total 0 0 0 0 0 Other CA % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total Current Assets 28,503 34,336 36,304 39,377 36,470 Property, plant and equipment (net) 44,458 63,690 68,858 78,6 91,780 Net PPE % of Sales 28.6% 32.1% 32.8% 35.6% 33.6% 32.5% Goodwill 0 4,636 4,623 4,637 4,619 Goodwill % of Sales 0.0% 2.3% 2.2% 2.1% 1.7% 1.7% Intangibles 0 0 0 0 0 Intangibles % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Long term investments 14,389 17,057 18,552 20,477 20,920 LT Invest. % of Sales 9.3% 8.6% 8.8% 9.3% 7.7% 8.7% Notes receivable -- long term 1,419 1,686 2,203 2,194 2,413 Notes Rec. % of Sales 0.9% 0.9% 1.0% 1.0% 0.9% 0.9% Other long term assets, total 4,439 4,428 2,088 3,491 4,963 Other LT ass. % Sales 2.9% 2.2% 1.0% 1.6% 1.8% 1.9% Other assets, total 0 0 0 0 0 Other assets % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Total assets 93,208 125,833 132,628 148,786 161,165 Liabilities and Shareholders' Equity Accounts payable,747 16,074 16,675 21,756 16,580 Acc. Payable % Sales 6.9% 8.1% 7.9% 9.8% 6.1% 7.8% Payable/accrued 0 0 0 0 0 Pay/accured % Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Accrued expenses 3,4 3,690 4,546 5,275 8,077 Acc. Exp. % of Sales 2.2% 1.9% 2.2% 2.4% 3.0% 2.3% Notes payable/short term debt 816 739 2,159 1,162 2,818 Notes payable % Sales 0.5% 0.4% 1.0% 0.5% 1.0% 0.7% Current portion of LT debt/capital leases 0 0 0 0 0 Curr. debt % of Sales 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Other current liabilities 3,822 4,508 5,029 5,605 4,548 Other curr liab % Sales 2.5% 2.3% 2.4% 2.5% 1.7% 2.3% Total Current Liabilities 18,795 25,011 28,409 33,798 32,023 Long term debt, total,456 12,131 7,679 6,070 6,083 LT debt % of Sales LT debt is manually adjusted for AFN in the pro formas Deferred income tax 7,268 11,262 11,647 12,170 11,539 Def. inc. tax % Sales 4.7% 5.7% 5.5% 5.5% 4.2% 5.1% Minority interest 172 200 209 204 469 Min. Int. % of Sales 0.1% 0.1% 0.1% 0.1% 0.2% 0.1% Other liabilities, total 11,287 14,553 15,749 19,456 24,403 Other liab. % of Sales 7.3% 7.3% 7.5% 8.8% 8.9% 8.0% Total Liabilities 47,978 63,157 63,693 71,698 74,517 Preferred stock (redeemable) 0 0 0 0 0 Preferred stock (unredeemable) 0 0 0 0 0 Common stock 1,706 1,832 1,832 1,832 1,832 Additonal paid-in capital 4,160 13,891 14,124 14,288 14,448 Retained earnings (accumluated deficit) 45,414 55,738 68,464 82,329 1,2 Treasury stock -- common (5,124) (7,870) (12,395) (18,892) (26,376) Set to last historical year's level throughout the forecasts. ESOP Debt Guarantee 0 0 0 0 0 Set to last historical year's level throughout the forecasts. Other equity, total (926) (915) (3,090) (2,469) (4,358) The model uses the more conservative diluted common shares Total Shareholders' Equity 45,230 62,676 68,935 77,088 86,648 number for total shares outstanding. Total Liabilities and Shareholders' Equity 93,208 125,833 132,628 148,786 161,165 Diluted weighted average shares 2,122 2,155 2,197 2,132 2,050 Diluted share growth 1.6% 2.0% -3.0% -3.8% -0.9% -3.0% Total preferred shares outstanding 0 0 0 0 The 0 model Preferred uses the share more growth conservative diluted common shares number for total shares outstanding.
CVX Valuation & Analysis Model Page 4 of 8 1 2 3 4 5 6 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 AO AP AQ AR AS AT AU AV AW AX AY AZ Model maintains a fixed ratio of ST debt/sales. LT debt is adjusted for shortfalls/surpluses of AFN. Every time something changes that affects the forecasts, set row 49 0.07 98,205 5,079 112,434 120,305 128,726 137,737 147,379 157,695 168,734 180,545 Year-by-year PPE/Sales 51.39% 49.99% 50.22% 50.70% 51.42% 52.40% 52.50% 52.50% 53.00% 53.00% Forecasted Balance Sheets -- Years year 2009E 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Assets Cash & equivalents,511 11,562 12,313 13,052 13,770 14,458 15,9 15,713 16,185 16,670 Short term investments 899 989 1,053 1,117 1,178 1,237 1,293 1,344 1,385 1,426 Receivables, total 11,466 12,613 13,433 14,239 15,022 15,773 16,483 17,142 17,656 18,186 Inventory, total 4,254 4,679 4,984 5,283 5,573 5,852 6,115 6,360 6,551 6,747 Prepaid expenses 2,608 2,869 3,056 3,239 3,417 3,588 3,750 3,900 4,017 4,137 Other current assets, total 0 0 0 0 0 0 0 0 0 0 Total Current Assets 29,739 32,713 34,839 36,929 38,960 40,908 42,749 44,459 45,793 47,167 Property, plant and equipment (net) 98,205 5,079 112,434 120,305 128,726 137,737 144,223 149,992 155,963 160,642 Goodwill 3,184 3,502 3,730 3,954 4,171 4,380 4,577 4,760 4,903 5,050 Intangibles 0 0 0 0 0 0 0 0 0 0 Long term investments 16,677 18,345 19,537 20,709 21,848 22,941 23,973 24,932 25,680 26,450 Notes receivable -- long term 1,793 1,972 2,0 2,226 2,348 2,466 2,577 2,680 2,760 2,843 Other long term assets, total 3,625 3,988 4,247 4,501 4,749 4,987 5,211 5,419 5,582 5,749 Other assets, total 0 0 0 0 0 0 0 0 0 0 Total assets 153,222 165,598 176,886 188,624 200,803 213,418 223,309 232,242 240,680 247,901 Liabilities and Shareholders' Equity Accounts payable 14,863 16,350 17,412 18,457 19,472 20,446 21,366 22,220 22,887 23,574 Payable/accrued 0 0 0 0 0 0 0 0 0 0 Accrued expenses 4,421 4,863 5,179 5,490 5,792 6,082 6,355 6,6 6,808 7,012 Notes payable/short term debt 1,332 1,465 1,560 1,654 1,745 1,832 1,914 1,991 2,050 2,112 Current portion of LT debt/capital leases 0 0 0 0 0 0 0 0 0 0 Other current liabilities 4,331 4,764 5,074 5,378 5,674 5,958 6,226 6,475 6,669 6,869 Total Current Liabilities 24,947 27,442 29,226 30,979 32,683 34,317 35,862 37,296 38,415 39,567 Long term debt, total 8,800 7,878 7,074 6,678 6,871 7,872 6,667 5,262 4,907 4,335 Deferred income tax 9,800,780 11,481 12,170 12,839 13,481 14,088 14,651 15,091 15,543 Minority interest 220 242 258 273 288 302 316 329 339 349 Other liabilities, total 15,232 16,755 17,844 18,915 19,955 20,953 21,895 22,771 23,454 24,158 Total Liabilities 58,999 63,097 65,882 69,015 72,636 76,925 78,828 80,309 82,206 83,952 Preferred stock (redeemable) 0 0 0 0 0 0 0 0 0 0 Preferred stock (unredeemable) 0 0 0 0 0 0 0 0 0 0 Common stock 1,832 1,832 1,832 1,832 1,832 1,832 1,832 1,832 1,832 1,832 Additonal paid-in capital 14,448 14,448 14,448 14,448 14,448 14,448 14,448 14,448 14,448 14,448 Retained earnings (accumluated deficit) 8,677 116,955 125,458 134,064 142,621 150,947 158,936 166,387 172,929 178,402 Treasury stock -- common (26,376) (26,376) (26,376) (26,376) (26,376) (26,376) (26,376) (26,376) (26,376) (26,376) ESOP Debt Guarantee 0 0 0 0 0 0 0 0 0 0 Other equity, total (4,358) (4,358) (4,358) (4,358) (4,358) (4,358) (4,358) (4,358) (4,358) (4,358) Total Shareholders' Equity 94,223 2,501 111,004 119,6 128,167 136,493 144,482 151,933 158,475 163,948 Total Liabilities and Shareholders' Equity 153,222 165,598 176,886 188,624 200,803 213,418 223,309 232,242 240,680 247,901 Total common shares (diluted) 1,989 1,929 1,871 1,815 1,760 1,708 1,656 1,607 1,558 1,512 Total preferred shares outstanding 0 0 0 0 0 0 0 0 0 0 AFN (interactive with 3 items below) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Adjustment to LT Debt (use Goal Seek) 2,716.7 (921.6) (803.8) (396.2) 193.0 1,000.5 (1,204.6) (1,405.4) (354.5) (572.2) Issue Common Stock to Fund AFN Set Balance Sheet Cash Lower to Fund AFN
CVX Valuation & Analysis Model Page 5 of 8 BA BB BC BD BE BF BG BH BI BJ BK BL BM BN BO BP 1 2 Enter Firm Ticker values in millions CVX 3 Historical Ratios and Valuation Model Forecasted Ratios and Valuation Model -- Years 4 2004 2005 2006 2007 2008 2009E 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 5 6 Liquidity Current 1.52 1.37 1.28 1.17 1.14 1.19 1.19 1.19 1.19 1.19 1.19 1.19 1.19 1.19 1.19 7 8 9 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 Quick 1.36 1.21 1.11 1.01 0.92 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 1.02 Net Working Capital to Total Assets 0. 0.07 0.06 0.04 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 Asset Management Days Sales Outstanding 29.21 31.65 30.62 37.09 21.20 21.90 21.90 21.90 21.90 21.90 21.90 21.90 21.90 21.90 21.90 Inventory Turnover 52.06 48. 45.13 41.60 39.83 44.92 44.92 44.92 44.92 44.92 44.92 44.92 44.92 44.92 44.92 Fixed Assets Turnover 3.49 3.11 3.05 2.81 2.97 1.95 2.00 1.99 1.97 1.94 1.91 1.90 1.90 1.89 1.89 Total Assets Turnover 1.67 1.58 1.58 1.48 1.69 1.25 1.27 1.27 1.26 1.25 1.23 1.23 1.23 1.22 1.22 Debt Management Long-Term Debt to Equity 23.1% 19.4% 11.1% 7.9% 7.0% 9.3% 7.7% 6.4% 5.6% 5.4% 5.8% 4.6% 3.5% 3.1% 2.6% Total Debt to Total Assets 12.1%.2% 7.4% 4.9% 5.5% 6.6% 5.6% 4.9% 4.4% 4.3% 4.5% 3.8% 3.1% 2.9% 2.6% Times Interest Earned N/A N/A N/A N/A N/A 42.3 50.9 59.2 65.4 66.9 62.0 74.2 93.1 0.8 113.4 Profitability Gross Profit Margin 26.4% 24.9% 29.1% 29.6% 29.4% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% 26.0% Operating Profit Margin 13.5% 13.0% 15.5% 14.7% 15.8% 12.3% 12.3% 12.3% 12.3% 12.3% 12.3% 12.3% 12.3% 12.3% 12.3% Net After-Tax Profit Margin 8.9% 7.4% 8.4% 8.6% 8.8% 7.0% 7.0% 7.0% 7.0% 7.1% 7.0% 7.1% 7.1% 7.1% 7.1% Total Assets Turnover 1.67 1.58 1.58 1.48 1.69 1.25 1.27 1.27 1.26 1.25 1.23 1.23 1.23 1.22 1.22 Return on Assets 14.8% 11.7% 13.3% 12.7% 14.9% 8.7% 8.9% 8.9% 8.9% 8.8% 8.7% 8.7% 8.7% 8.7% 8.7% Equity Multiplier 2.06 2.01 1.92 1.93 1.86 1.63 1.62 1.59 1.58 1.57 1.56 1.55 1.53 1.52 1.51 Return on Equity 30.6% 23.4% 25.6% 24.6% 27.7% 14.2% 14.4% 14.2% 14.0% 13.8% 13.6% 13.4% 13.3% 13.2% 13.1% Free Cash Flow Per Share ($2.60) $5.70 $5.95 $5.63 $3.88 $3.88 $4.37 $4.75 $5.13 $5.48 $7.70 $8.89 $9.49 $11.05 EPS (using diluted shares, excluding extraordinary items) 6.37 6.81 8.04 8.90 11.72 6.72 7.65 8.42 9.22.03.84 11.71 12.59 13.38 14.23 DPS (dividends per share) 1.53 1.75 2.00 2.25 2.52 2.91 3.36 3.88 4.48 5.17 5.97 6.89 7.95 9.19.61 Valuation Metrics Trend Analysis (NOPAT, EVA, MVA, FCF and Capital in millions) Forecasted Valuation Metrics -- Years 2004 2005 2006 2007 2008 2009 20 2011 2012 2013 2014 2015 2016 2017 2018 NOPAT (net operating profit after tax) 13,525 14,677 17,659 18,961 24,031 13,680 15,048 16,026 16,988 17,922 18,818 19,665 20,452 21,065 21,697 ROIC (return on invested capital) 24.6% 19.5% 22.0% 21.9% 24.2% 13.0% 13.4% 13.3% 13.2% 13.0% 12.8% 12.8% 12.8% 12.6% 12.6% EVA (economic value added) 7,804 6,848 9,295 9,944 13,716 2,744 3,324 3,486 3,578 3,587 3,499 3,626 3,771 3,731 3,843 FCF (free cash flow) N/A (5,593) 12,519 12,678 11,548 7,709 7,480 8,175 8,629 9,027 9,352 12,749 14,283 14,783 16,698 Weighted Average Cost of Capital.4%.4%.4%.4%.4%.4%.4%.4%.4%.4%.4% Net Operating Working Capital (NOWC),546 11,584 11,556 8,087 7,400 6,947 7,641 8,138 8,626 9,1 9,556 9,986,385,697 11,017 Operating Long Term Assets 44,458 63,690 68,858 78,6 91,780 98,205 5,079 112,434 120,305 128,726 137,737 144,223 149,992 155,963 160,642 Total Operating Capital 55,004 75,274 80,414 86,697 99,180 5,152 112,720 120,572 128,931 137,827 147,293 154,208 160,377 166,659 171,659 Valuation (in millions) -- through year 2018 2008 2009 20 2011 2012 2013 2014 2015 2016 2017 2018 Long-term Horizon Value Growth Rate (user-supplied) 3.00% PV of Forecasted FCF, discounted at.40% $147,193 $154,793 $163,413 $172,235 $181,520 $191,373 $201,925 $2,177 $217,754 $225,619 $247,512 Value of Non-Operating Assets $9,560 $11,4 $12,551 $13,367 $14,169 $14,948 $15,695 $16,402 $17,058 $17,570 $18,097 Total Intrinsic Value of the Firm $156,753 $166,203 $175,964 $185,602 $195,689 $206,321 $217,620 $226,579 $234,811 $243,188 $265,609 Intrinsic Market Value of the Equity $147,852 $157,302 $167,063 $176,701 $186,788 $197,420 $208,719 $217,678 $225,9 $234,287 $256,708 Per Share Intrinsic Value of the Firm $72.12 $79.11 $86.61 $94.44 $2.92 $112.14 $122.23 $131.42 $140.61 $150.33 $169.81 MVA (market value added) $61,204 $63,079 $64,563 $65,697 $67,178 $69,253 $72,226 $73,196 $73,977 $75,813 $92,759 Weighted Average Cost of Capital Calculations Capital Asset Pricing Model Item Value Percent Cost Weighted Cost Risk Free Rate 4.00% ST Debt (from most recent balance sheet) 2,818 2.00% 3.78% 0.04% Beta 1.15 LT Debt (from most recent balance sheet) 6,083 4.31% 5.77% 0.14% Market Risk Prem. 6.00% MV Equity (look up stock's mkt. cap and enter in cell BB53) 132,320 93.70%.90%.21% Cost of Equity.90% Weighted Average Cost of Capital.40% Source: Yahoo (3/8/09) http://finance.yahoo.com/bonds/composite_bond_rates
CVX Valuation & Analysis Model Page 6 of 8 BQ BR BS BT BU BV BW BX BY BZ CA CB CC CD CE CF CG CH 1 2 3 4 5 6 In this section we are going to examine historical and forecasted ratios (or "multiples") typically used to value stocks P/CF, Enterprise Value/EBITDA, etc. We first want to compare the historical trends in these ratios to the trends in their forecasted values. If our forecasted multiples are systematically increasing or decreasing our forecasts may be too optimistic or pessimistic, and our forecast assumptions may have to be adjusted. Second, we want to compare our discounted cash flow valuation estimates with those derived from the various multiples. Once again, if there is a large discrepancy between our DCF valuation estimate of the company's stock and the range of values obtained from the various multiples, we may want to adjust our forecast assumptions. 1. You will need to look up the company's year end stock prices and enter them in the first 5 (historical) years of the "per share value" category. 7 2. Use the estimated DCF price per share in the forecasted period (link to your forecasted prices in cells BG47 BP47. 8 3. Market capitalization will be calculated as basic weighted shares x historical year end prices and then forecasted basic weighted shares x DCF forecasted prices. 4. As with previous calculations, historical multiples use actual historical values and forecasted multiples use forecasted values. 9 11 12 Historical Ratios and Valuation Forecasted Ratios and Valuation 13 Inputs 2004 2005 2006 2007 2008 2009E 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 14 Per share value (hist. & DCF est.) $52.51 $56.77 $73.53 $93.35 $76.52 $79.11 $86.61 $94.44 $2.92 $112.14 $122.23 $131.42 $140.61 $150.33 $169.81 15 Market capitalization $111,114 $121,726 $160,737 $197,675 $155,948 $156,381 $166,085 $175,666 $185,694 $196,264 $207,497 $216,404 $224,588 $232,916 $255,205 16 EBITDA $26,271 $31,688 $40,003 $41,148 $52,585 $20,497 $22,500 $23,930 $25,344 $26,733 $28,084 $29,309 $30,440 $31,340 $32,263 17 Enterprise Value $113,267 $124,753 $160,291 $197,749 $155,971 $156,222 $164,8 $172,245 $181,247 $191,398 $203,045 $2,192 $216,456 $224,027 $245,330 18 19 Multiples Price/Sales 0.72 0.61 0.76 0.89 0.57 0.82 0.79 0.78 0.78 0.78 0.79 0.79 0.79 0.79 0.84 20 Price/EBITDA 4.23 3.84 4.02 4.80 2.97 7.63 7.38 7.34 7.33 7.34 7.39 7.38 7.38 7.43 7.91 21 Price/Free Cash Flow N/A -21.48 12.59 16. 14.03 20.29 22.21 21.49 21.52 21.74 22.19 16.97 15.72 15.76 15.28 22 Enterprise Value/EBITDA 4.31 3.94 4.01 4.81 2.97 7.62 7.29 7.20 7.15 7.16 7.23 7.17 7.11 7.15 7.60 23 Price/Earnings 8.24 8.33 9.15.49 6.53 11.78 11.32 11.22 11.17 11.18 11.27 11.22 11.17 11.23 11.94 24 Dividend Yield 2.90% 3.09% 2.72% 2.41% 3.29% 3.68% 3.88% 4.% 4.35% 4.61% 4.88% 5.24% 5.66% 6.11% 6.25% 25 Historical Override Forecasted Stock Prices Based on Historical Multiples -- Years 26 Valuation Estimates Based On: Average w/manual 2009E 20E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 27 Price/Sales 0.71 $68.44 $77.61 $85.21 $93.12 $1.28 $9.63 $118.11 $126.63 $134.47 $142.78 28 Price/EBITDA 3.97 $41.18 $46.60 $51. $55.79 $60.67 $65.71 $70.69 $75.69 $80.34 $85.26 29 Price/Free Cash Flow 5.31 15.00 $58.49 $58.51 $65.92 $71.74 $77.37 $82.64 $116.14 $134.14 $143.12 $166.66 30 Enterprise Value/EBITDA 4.01 $41.53 $47.00 $51.53 $56.27 $61.18 $66.26 $71.29 $76.33 $81.02 $85.99 31 Price/Earnings 8.55 $57.76 $65.77 $72.41 $79.26 $86.23 $93.24 $0.71 $8.28 $115.07 $122.33 32 Low Price $41.18 $46.60 $51. $55.79 $60.67 $65.71 $70.69 $75.69 $80.34 $85.26 33 High Price $68.44 $77.61 $85.21 $93.12 $1.28 $9.63 $118.11 $134.14 $143.12 $166.66 34 35 DCF Price $79.11 $86.61 $94.44 $2.92 $112.14 $122.23 $131.42 $140.61 $150.33 $169.81 36 37 Price/Sales and Enterprise Value/EBITDA vs. Price Forecasted Per Share Stock Values 38 25 $180 $180 39 35 $180 $170 $140 $145 $160 $160 40 20 30 $160 $150 41 $140 $120 $140 $140 $130 $120 42 25 $0 $120 43 15 $120 $120 $1 20 $95 44 $0 $0 $0 $80 $90 45 15 $80 $80 46 $60 $70 $70 47 $60 $60 5 48 5 $40 $50 $40 $40 $45 49 $30 0 0 $20 $20 50 51 $20 52 53 54 55 56 Price/Sales Enterprise Value/EBITDA DCF DCF Price Price Low Price Price DCF Price High High Price P/S and Ent. Value/EBITDA DCF Price Forecasted Value Per Share