About Chevron
The past few months have been brutal on us mere mortals, but fantastic for oil and gas companies!
As summer travel demand increases and volatility overseas continues to rear its ugly head (along with being in somewhat of a monopolistic industry), most of the major oil companies have seen huge rises in share price.
Chevron is one of those companies.
San Ramon, California-based Chevron is historical in that the company descended from John and William Rockefeller’s Standard Oil. As time went on, Standard Oil split into ExxonMobil and Chevron, which is crazy to think about.
Specifically, consider how strong of a presence each of these companies has and then double it. One single company, Standard Oil, had that much market power.
Nonetheless, it’s for the best that Standard Oil split up into different entities, allowing for some much-needed competition in the oil and gas market. However, don’t let that fool you; Chevron is a huge company.
In fact, according to some sources Chevron is the second largest oil and gas company in the United States (based on revenue), a distant second to of course, ExxonMobil.
Ok, so you have a better idea of some of the history behind Chevron and its fellow oil giants, but what does the company actually do, and equally important, how do they make money?
Upstream and downstream.
Specifically, in recent history upstream reportedly accounts for 25% of Chevron’s revenue while downstream accounts for around 74% (the other 1% is considered “other”). Upstream primarily involves the initial exploration, discovery and use or production of gas and oil. On the other hand, from our understanding downstream can be seen as the final process before consumers are able to use oil or natural gas. It can be considered the closest step to the finished product(s) of gasoline and diesel or what we pump at the gas station. Some downstream activities include production at refineries, plants and other venues in which gas, diesel and other products are produced and subsequently transported to gas stations.
So, it seems like Chevron makes a lot of money from their sale of fuel, gas and other products but it should be noted that about one fourth (according to the previously mentioned report) of their revenue comes from upstream.
Being that Chevron is such a large company with a substantial number of operations across the globe, we feel it is necessary to highlight both their operations in the United States and overseas.
Chevron’s global operations
Let’s start in the United States.
Chevron has extensive operations in the Gulf of Mexico with deep-water drilling equipment over one hundred miles offshore from New Orleans, pipeline and well infrastructure in Colorado and a lot of production in California as well.
While the company has many other operations across the country, these are some of the more noteworthy of the bunch.
Now, let’s go overseas where we are most excited and bullish about Chevron’s current and future prospects.
The company has 26 international operations (excluding the United States) listed on their website stretching from concentrated areas of Europe, South America, all the way up to eastern Asia, the middle east and Africa as well.
This is a very diversified portfolio of operations.
We love that Chevron has the international capabilities and footprint(s) it currently has.
The more the company can abstain from relying solely on one country or region of the world, the better hedged it is from volatility such as geopolitical conflicts, unfavorable regime changes and sudden regional supply and demand changes.
Through the company’s various subsidiaries, we are confident in their operations going forward.
Now that you have a better understanding of what Chevron does, how it does it and where the company operates, let’s walk you through some of the stock’s core financials and whether or not you should consider buying shares in Chevron’s stock.
Chevron’s stock financials
Remember how we mentioned that it was a great time to be a major oil and gas company?
We weren’t kidding.
The company’s share price (NYSE: CVX) is up nearly 84% since mid-September 2021. This meteoric rise in stock price can likely be attributed to increase in demand combined with volatility across the pond.
Nevertheless, I don’t want to worry about the price of oil and having to monitor it 24/7 if I bought stock in a major oil and gas player. I want a company that’s as recession-proof as possible with a strong balance sheet, diversified and strategic global operations and decent profitability metrics.
Let’s see if Chevron can supply what’s on my wish list.
The company currently has a market capitalization of a whopping $296.7 billion and a price-to-earnings (P/E) ratio of around 13.8.
Their P/E ratio indicates that the company’s current share price is undervalued given that a ratio of 20 is generally considered to mean shares are trading at fair value (what they’re actually worth) and anything below 20 suggests that the share price is undervalued, which can obviously be favorable for investors. The fact that Chevron’s current stock price appears to be undervalued is encouraging given that the stock price has already risen substantially in recent history; this indicates the company has more value to offer investors.
Skimming over to Chevron’s balance sheet, the company has approximately $240 billion in total assets and $100.4 billion in total liabilities. This is not a very good balance sheet; this is a phenomenal balance sheet.
Total liabilities are outweighed by total assets by a considerable margin, giving our team massive confidence in Chevron’s ability to weather any economic storm(s) that come its way.
Over to the company’s income statement, their total revenue has fluctuated a bit but has (in the past five years) generally stayed in the $140-150 billion range, dipping down to around $94.4 billion in 2020 which was likely caused by an overall decrease in demand for oil and gas due to people traveling less during the onset and progression of the pandemic.
Onto Chevron’s cash flow statement, in the past five years they’ve generated generally strong cash flow as it relates specifically to their net income, dipping down in 2019 and 2020 which again was likely caused by the pandemic. We also aren’t terribly worried about the company’s current or future fluctuations in net income given that consolidation is commonplace in the oil and gas industry. Specifically, negative net income in certain years could simply be caused by Chevron acquiring another company or investing heavily in a new project which tends to be good for shareholders in the long run. As long as the balance sheet remains strong and revenue remains steady, we don’t think investors should be losing much sleep over the company’s annual net income.
Chevron’s stock fundamentals
Since the oil and gas industry is competitive, it’s naturally harder for companies, even the major players in the space, to extract a profit.
Thankfully, Chevron seems to do it notably better than the industry as a whole.
Specifically, the company has a trailing twelve month (TTM) net profit margin of around 11.6% compared to the industry’s 6.71% according to TD Ameritrade’s platform. If Chevron can achieve higher overall profits than fellow oil and gas domineers, all the better for prospective and current investors in the company.
Chevron also currently provides investors with a fairly large annual dividend of $5.68 which is quite attractive to us and given the relative financial strength we’ve identified in this company; they can likely afford to distribute such a high dividend.
As it relates to the company’s trailing twelve month returns on equity, assets, and investment they are basically in line with the industry average for each of these categories, which is definitely not a bad thing. As long as their returns aren’t considerably lower than the industry average, we’re not too concerned.
Should you buy Chevron stock?
From our perspective, there isn’t much to complain about when it comes to Chevron and its stock.
For being in such a cyclical, volatile industry the company has historically done a fantastic job overall in managing its assets, staying ahead of the cycle and providing for customers while generating strong numbers across the board. Of course, Chevron is not a perfect stock; none of them are. It’s just a company that, according to their core financials, is well-positioned to continue performing at an efficient and profitable rate.
Given all this information, we give the company a “buy” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.