chevron corporation (cvx) energy and natural resources coverage group
TRANSCRIPT
Chevron Corporation (CVX)
Energy and Natural Resources Coverage Group
Company Overview
• Upstream: exploring and developing oil and gas– Benefits from high oil
prices– Revenue decrease of
18% in 2014• Downstream: refining
and purifying crude resources– Benefits from low oil
prices– Revenue increase of
93.4% in 2014
Ticker CVX
Price $106.68
Market Cap $200.58B
Dividend $4.28
P/E 10.52
EPS $10.14
Management
• John S. Watson - CEO (2010-present)– 30+ years of experience with the
company – Variety of managerial roles
• George L. Kirkland (2010-present)– 40+ years at Chevron– Engineer turned management– Head of upstream - most important
division • Pierre R. Breber (2014-present)
– 25+ years as engineer and midstream exec
• Overall: seasoned team with relevant industry experience from both corporate and engineering perspectives
Sector Performance
Thesis Summary• The market has overestimated the damage of the fall
in oil prices on global energy players• Chevron is in the best position amongst these
companies to take advantage of depressed energy prices and subsequent recovery– Has achieved relatives success in vertical
integration (especially transportation services) compared to its competitors
– Effective access to cash allows for expansion of oil projects as firms such as BP are forced to consolidate
– Multiple new projects to be brought online, such as the largest enhanced oil recovery project, and extensive technology development
Oil Price Prediction
• Price factors– Lagging demand: slow
global growth – China, Japan, Europe
– Will they recover?– Increased supply: shale
etc.– Price elasticity of
supply?• Uncertain outlook• Futures ~50% volatility with
95% C.I. low price $30 and high end $90
• Supply disruptions in major geopolitical players?– Iran, Venezuela, Russia
Rebounding Oil Prices
• Companies within OPEC such as Nigeria (whose oil minister is the president of OPEC) incredibly concerned with depressed prices and are currently in talks to organize future action– Numerous countries such as Venezuela
and Russia need higher oil prices to sustain their budgets
• Domestic producers (especially shale) are maintaining or cutting production, which will lead to less supply and higher prices
Vertical Integration Advantage
• Shell and BP have been investigated for anti-trust issues in Europe
• Best hedged against ramifications of energy trade war with China (there are likely Congressional tariffs on business with Chinese subsidiary companies) due to other companies not having majority control of their Chinese subsidiaries
Cash Advantage
• Chevron assumed leadership and partial ownership of multibillion dollar projects in Gila, Tiber, and the Gulf of Mexico from BP in January
• Chevron has been increasing investments in the deepest areas of the Gulf of Mexico as other companies have continued to cut investment as well as began pumping from sources that have not been used in over a decade
• Chevron was able to raise $6 billion with bonds to help push through the volatility in oil prices
• Suspension of buy-back program will increase available capital for investment
Project and Technology Advantage
• Manages the world’s largest hyper-efficient, enhanced oil recovery extraction project– Led to sell off when announced, but critical in in growing
market share once oil markets normalize• Had one of its best exploration years, with important
discoveries in the deepwater Gulf of Mexico, Australia, West Africa and the Permian Basin
• Recently brought a new deep-water oil platform online– Expected to produce 94,000 barrels per day of oil/21
million cubic feet of natural gas.• Can generate that 10% breakeven even at oil prices as low as
$30 per barrel, and production is forecasted to increase 20% from 2013 industry benchmarks by 2017
• Chevron Technology Ventures is over a decade old and currently has invested over $200 million in start ups and other emerging technologies
Thesis Summary• The market has overestimated the damage of the fall
in oil prices on global energy players• Chevron is in the best position amongst these
companies to take advantage of depressed energy prices and subsequent recovery– Has achieved relatives success in vertical
integration (especially transportation services) compared to its competitors
– Effective access to cash allows for expansion of oil projects as firms such as BP are forced to consolidate
– Multiple new projects to be brought online, such as the largest hyper-efficient oil extraction project, and extensive technology development
Comps Model
Company Ticker
Price Market Cap
P/E P/B Dividend Yield
EV/EBITDA
Chevron CVX $106.68 $200.58B
10.52 1.3 4.00% 5.90
ExxonMobil
XOM $88.54 $371.40B
11.66 2.14 3.10% 7.06
Shell RDS $65.37 $205.75B
13.87 1.19 4.70% 5.18
BP BP $41.44 $125.70B
33.86 1.13 5.80% 5.28
ConocoPhillips
COP $64.40 $79.31B 11.69 1.55 4.50% 5.00
More ComparativesCompany Ticker Cash Debt Debt/Equity Exploration
Failure Rate(Last reported year)
Chevron CVX $13.22B $27.82B 17.81 30%
ExxonMobil XOM $4.62B $29.12B 16.08 39%
Shell RDS $21.61B $45.54B 26.36 N/A
BP BP $30.09B $52.85B 46.92 53%
ConocoPhillips COP $5.06B $22.56B 43.17 N/A
Risk Factors• Tied to the uncertain
oil market• Downside risk
– Dip into cash reserve?
– Dividend impact?– Future exploration
projects affected by lower per barrel prices
• Ceiling for the foreseeable future?– CVX vs market
expectations
Why aren’t we worried about Chevron?
• Well-positioned for decline in oil prices– No real risk of
dividend decline– Ramifications of
decline for smaller producers
– Cash on hand• Not a short-term
play– Dividend in the
interim
Downstream Hedge• In the downstream, CVX completed important
investments at U.S. refineries, which contributed to improved financial and operational performance.
1. New premium lubricants base oil facility in Mississippi.
2. Expansion of additives plants in Singapore and France.
3. Chevron Phillips Chemical Company LLC, achieved start-up of the world’s largest on-purpose 1-hexene plant and progressed construction of its new ethane cracker and polyethylene units in Texas.
Earnings
Upstream90%
Downstream10%
2013
Up-stream80%
Downstream20%
2014
Discounted Cash Flow
Targets
• Target price: oil breaks $70/barrel, stock price around $122
• Exit if: oil drops below $35/barrel• Timeline: 2-2.5 years