March 12, 2015 Chevron Corporation Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 07/19/2011 Current Price (03/11/15) $103.54 Target Price $109.00 52-Week High $134.85 52-Week Low $100.86 One-Year Return (%) -6.34 Beta 1.13 Average Daily Volume (sh) 6,701,301 Shares Outstanding (mil) 1,880 Market Capitalization ($mil) $194,674 Short Interest Ratio (days) 2.70 Institutional Ownership (%) 63 Insider Ownership (%) 1 Annual Cash Dividend $4.28 Dividend Yield (%) 4.13 5-Yr. Historical Growth Rates Sales (%) 2.3 Earnings Per Share (%) 5.2 Dividend (%) 10.8 using TTM EPS 10.2 using 2015 Estimate 26.7 using 2016 Estimate 16.1 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page SUMMARY Risk Level * (CVX-NYSE) Chevron Corp. is one of the largest integrated energy companies in the world with an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets among its peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions. However, the ongoing oil price slump has adversely affected the group s earnings and cash flows, particularly at its upstream unit. We are also concerned by the company s high level of capital spending, which may result in reduced returns going forward. As such, we see the stock performing in line with the broader market and, therefore, maintain our Neutral recommendation. Below Avg., Type of Stock Large-Value Industry Oil-Intl Intgd Zacks Industry Rank * 244 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 56,818 A 57,369 A 58,503 A 56,158 A 228,848 A 2014 53,265 A 57,938 A 54,679 A 46,088 A 211,970 A 2015 21,671 E 28,640 E 34,951 E 32,807 E 118,069 E 2016 159,871 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $3.18 A $2.77 A $2.57 A $2.57 A $11.09 A 2014 $2.36 A $2.98 A $2.95 A $1.85 A $10.14 A 2015 $0.74 E $0.90 E $1.16 E $1.08 E $3.88 E 2016 $6.44 E Projected EPS Growth - Next 5 Years % 2 2015 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW San Ramon, CA-based Chevron Corporation (CVX) is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energyrelated businesses. Chevron, in its present form, resulted from the 2001 merger between Texaco and Chevron Corporation. In Aug 2005, the company acquired Unocal for $18.4 billion. The company divides its operations into two main segments: Upstream and Downstream. Upstream: Chevron has extensive upstream operations in all major hydrocarbon-producing regions of the world. The company is primarily involved in the acquisition, development and exploitation of crude oil and natural gas properties. Chevron s upstream activities also consist of liquefied natural gas (LNG) liquefaction, transportation and regasification work; oil and gas midstream operations; as well as a gas-to-liquids project. As of the end of 2014, the company had proved reserves of approximately 11.1 billion oil-equivalent barrels (BBOE). Internationally, Chevron has significant operations in West Africa (Angola and Nigeria), Asia-Pacific (Australia and Indonesia), and Kazakhstan. Chevron currently produces at an average rate of about 2.6 million oil-equivalent barrels per day (MMBOE/d), of which just over 25% comes from the U.S. and only about a third of the total is natural gas (reflecting its geographicallydiversified operations and substantial crude oil leverage). This segment contributed bulk of the company s 2014 earnings. Downstream: This segment comprises Chevron s worldwide portfolio of refining, marketing, distribution and chemical assets. The company through its wholly-owned and affiliated refineries has a capacity to process about 2 million barrels per day (MMBbl/d) of crude oil. Chevron has nearly 17,000 retail sites worldwide that market refined products under the Chevron, Texaco, and Caltex brands. The company also owns 11,603 net miles of pipelines worldwide, including a 15% interest in the Caspian Pipeline Consortium that links the Tengiz oil field to the Russian Black Sea port of Novorossiysk. The company s chemicals operations are handled by Chevron Phillips Chemicals Company, a 50/50 joint venture with ConocoPhillips. The joint venture is one of the world s largest commodity petrochemicals producer, with 30 manufacturing facilities and 8 research and technical centers in 9 countries. Chevron s other activities include coal mining and power generation, besides others. REASONS TO BUY Chevron s current oil and gas development project pipeline is among the best in the industry targeting volume growth of 20% by 2017 (from 2014 levels) driven by the big Australian LNG projects (Gorgon and Wheatstone), as well as deepwater developments in the U.S. Gulf of Mexico (GoM). Chevron recently found first oil and natural gas from the Jack/St. Malo project located in deepwater U.S. GoM. The fields are among the largest in the region and can produce as much of 94,000 barrels of crude oil and 21 million cubic feet of natural gas per day at their peak. The company has also acquired rights to explore three offshore blocks in New Zealand, which significantly expands its portfolio of long-term projects in the Asia-Pacific region. Equity Research Page 2
The company s financial flexibility and strong balance sheet are real assets in this highly-uncertain period for the economy. Chevron remains in excellent financial health, with nearly $13 billion in cash on hand and an investment-grade credit rating with a debt-to-capitalization ratio of just over 15%. Management has established quite a track record of conservative capital management and cash returns to shareholders. It also pays a growing dividend, currently yielding an attractive 4.1%. Chevron has targeted quarterly buybacks of up to $1 billion of its common stock since late 2010. We believe that the repurchase program not only highlights the company s commitment to create value for shareholders but also underlines Chevron s confidence in commodity prices. Even though the bulk of Chevron s sales/earnings are dependent on non-renewable energy sources like crude oil and natural gas, the company also focuses on developing alternative energy solutions. In this regard, Chevron has made strategic investments in geothermal, solar technologies and other sources of energy. It is also involved in the development of solutions, which takes waste streams of organic material and converts them into renewable energy that provides on-site power for wastewater treatment plants. REASONS TO SELL With crude prices tumbling 50% since June, Chevron s upstream division has been able to extract less value for their products. This has pressured the group s profit margins. Chevron conducts operations in many countries. As such, the company is exposed to risks associated with doing business abroad. Such risks include embargoes and/or expropriation of assets, exchange rate risks, terrorism and political/civil sentiment, etc. Excess capacity and weak product demand on the back of a sluggish economy will continue to put pressure on refining margins. Though Chevron has trimmed the amount of resources it devotes to the downstream business and has reduced its refining exposure through divestitures, the company remains integrated to complement its larger exposure to the upstream segment. As such, Chevron is not immune to the headwinds of the industry. Chevron has pegged its 2015 capital budget at $35 billion. Though lower than previous year, this is expected to substantially increase Chevron s leverage and deteriorate its credit metrics. Additionally, the increasing capital intensity of its operations may result in reduced returns going forward. Chevron s production growth profile depends on the timely development of upstream projects, almost all of which have inherent risk factors. Time and cost overruns on these programs may lead to lower returns going forward. RECENT NEWS Chevron to Expedite Asset Sale as Crude Price Stays Soft On Mar 10, 2015, Chevron Corp., in its analyst meeting, announced the decision to accelerate its asset divestment program and lower cost. The decision rests on the company s goal of maintaining regular cash flows to its shareholders amid low crude prices. Moreover, John Watson, chairperson of the integrated player, reaffirmed that Chevron will trim capital spending this year. Equity Research Page 3
Owing to abundant supply and lackluster global demand, crude prices have plummeted more than 55% since last June. On top of that, most analysts do not expect an oil price recovery any time soon. Hence, the company s decisions to weather unfavorable business environment are quite justified. Chevron is planning to divest $15 billion worth assets through 2017, 50% higher than the prior target of $10 billion. The company is also willing to lower its 2015 capital expenditure by 13% to $35 billion from $40 billion invested during 2014. Watson added that the company s $54 billion worth Gorgon project in Australia is now nearing completion and should lead to capital expenditure reduction. Both measures reflect Chevron s intention to increase liquidity and strengthen balance sheet especially when oil price is low. With the proceeds from the asset sale and cost reduction, the company will be able to provide significant cash flows, in the form of strong dividend, to the shareholders in an adverse business scenario. For investors, Chevron has more good news. By 2017, the energy major intends to increase its production by 20% to 3.1 million barrels of oil equivalent per day. Fourth Quarter 2014 Results On Jan 30, 2015, Chevron Corp. reported better-than-expected fourth quarter earnings on improved downstream results that saw refining margins climb on lower input costs. Earnings per share came in at $1.85, well above the Zacks Consensus Estimate of $1.67. However, Chevron s performance deteriorated from the year-ago profit of $2.57 per share amid a plunge in oil prices. The company s quarterly revenue moved down 17.9% year over year to $46,088 million. However, it was enough to beat the Zacks Consensus Estimate of $33,277 million. Apart from the operational performance, Chevron also offered a glimpse of its 2015 capital spending plans. The company has pegged its capital budget at $35 billion, down 13% from the $40 billion it invested in 2014. Segment Performance Upstream: Chevron s total production of crude oil and natural gas remained essentially unchanged from the year-earlier level at 2,582 thousand oil-equivalent barrels per day (MBOE/d). Though the U.S. output augmented 3.5% year over year, the company s international operations (accounting for 74% of the total) registered a 0.9% fall in volumes. Contribution from project ramp-ups in the U.S., Nigeria, Brazil, Argentina and Bangladesh were offset by normal field declines and output loss as a result of Chevron s policy to shed some of its less-profitable projects. However, the status-quo on the production front could not make up for the sharp downfall in oil prices, the net effect resulting in a 44.9% year-over-year decline in upstream earnings to $2,673 million. Importantly, Chevron s production outlook remains one of the most robust in its peer group, with a number of major initiatives scheduled to come online during the next few years. Major start-ups during the last few months include the Jack/St. Malo and Tubular Bells deepwater developments in the Gulf of Mexico, Bibiyana Expansion Project in Bangladesh, liquefied natural gas (LNG) project in Angola, deepwater Usan project and the Escravos Gas-to-Liquids facility in Nigeria, Caesar/Tonga project in the deepwater Gulf of Mexico, and the Chirag development in the Caspian Sea. Equity Research Page 4
Amongst the major upcoming projects, Chevron s Gorgon and Wheatstone natural gas initiatives in Australia are progressing well, while the company continues to successfully explore unconventional resources in the Permian Basin, Argentina and Canada. Downstream: Chevron s downstream segment achieved earnings of $1,518 million, considerably higher than the profit of $390 million last year. The results were buoyed by higher refinery margins on the back of lower feedstock costs. Capital Expenditure, Balance Sheet & Share Repurchases The second-largest U.S. oil company by market value after Exxon Mobil spent $11,290 million in capital expenditures during the quarter. Approximately 91% of the total outlays pertained to upstream projects. As of Dec 31, 2014, the San Ramon, CA-based company had $12,785 million in cash and total debt of $27,818 million, with a debt-to-total capitalization ratio of about 15.2%. As part of the stock repurchase program, Chevron bought back $1,250 million worth of shares in the fourth quarter. VALUATION Chevron s trailing 12-month P/CF multiple is 5.4, compared to the 4.6 average for the peer group and 14.6 for the S&P 500. The company s trailing 12-month EV/EBITDA multiple is 4.3, compared to the industry average of 4.6. Chevron is one of the largest integrated energy companies in the world and has an impressive business model. Its current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets among peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions. Additionally, Chevron s strategic initiatives aggressive cost reduction initiatives, exiting unprofitable markets and streamlining the organization are expected to have a long-term positive impact for the firm. However, shares of the company are fairly valued at current levels, considering the unprecedented oil slide that has rocked producers like Chevron. We are also concerned by the company s high level of capital spending, which may result in reduced returns, going forward. Our continued Neutral recommendation and $109 target price, a multiple of 5.7X the trailing twelvemonth cash flow, reflects this view. Equity Research Page 5
Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Chevron Corp. (CVX) 26.7 16.1 2.0 5.4 10.2 12.6 6.9 Industry Average 17.1 11.9 5.7 4.6 8.8 49.2 5.6 S&P 500 16.3 15.2 10.7 14.6 17.9 18.4 12.0 Total SA (TOT) 13.6 11.1 5.4 4.0 8.6 12.1 6.2 BP plc (BP) 20.0 12.6 5.0 4.3 9.9 12.8 4.1 Eni SpA-ADR (E) 28.7 14.5 7.7 3.8 14.3 17.3 5.8 Gazprom OAA-ADR (OGZPY) 0.1 2.4 5.0 1.9 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Chevron Corp. (CVX) 1.3 2.0 1.2 12.4 0.2 4.1 4.3 Industry Average 0.9 0.9 0.9-58.8 0.5 3.9 4.6 S&P 500 6.2 9.8 3.2 25.4 2.0 Equity Research Page 6
Earnings Surprise and Estimate Revision History Equity Research Page 7
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of CVX. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129 companies covered: Outperform - 15.5%, Neutral - 74.8%, Underperform 8.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research Page 8