Are Shares of Chevron Worth BUYING NOW?

These days most stocks that report to the downside get spanked and sent to sit in the corner of the classroom till next quarter.  Not so with integrated oil and gas giant Chevron (NYSE:CVX).  Their recent quarterly earnings report was mixed, with an EPS beat and revenue miss; and as you know right now investors are paranoid about declining revenue.  With the price of oil in free fall for many months analysts expected earnings of $3.24 per share, down from $3.85 in Q2 2011.  The company reported $3.66 per share along with a 9% drop in revenue; coming in at $62.61 Billion with consensus analyst expectations at $68.56 Billion.

The shares dropped a bit on the day of the announcement but at the start of trading the following week Chevron’s share price began flirting with a new 52 Week High.  In a market climate obsessed with revenue worries, what happened?  Is Chevron right now a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

C = Catalyst for a Stock’s Movement

Chevron operates in an industry particularly vulnerable to global economic slowdowns as well as to the resultant violent swings in the price of oil and natural gas.  The company is managing to stay on top of the current wall or worry about Europe, China, the US fiscal cliff, and assorted other doomsday forecasts.  Any strong signal of improvement on any of these fronts could provide a significant catalyst for the share price.

H = High Quality Pipeline

Analysts are bullish in the majority on Chevron, with only 4 HOLD ratings and 16 STRONG BUYS or BUYS, according to Thompson/First Call.  The company’s superior project pipeline is one of the reasons most often cited.  Recent developments highlighted by Chevron management include preliminary design work – FEED or Front End Engineering Design – in a UK deep water oil drilling project; acquisition of additional oil assets in the Kurdistan region of Iraq and offshore in Suriname; additional shelf and deep-water exploration assets in the Gulf of Mexico; and a 50% interest in a shale gas development in Ukraine as well as a new natural gas find in Australia.

With new technologies, the recoverable reserves of oil are pushing back the date of peak oil, the moment oil production maxes out and begins to decline.  In short, oil will be with us far longer than some think, but a growing number of experts are looking at natural gas as the fuel of the future.

Chevron is at the forefront of the LNG (Liquefied Natural Gas) boom that is already beginning and should accelerate over the next decade.  Right now billions are being invested in developing LNG “trains” or processing facilities where natural gas feedstock can be liquefied for export and Australia is leading the way.  Chevron has two massive projects underway there called Wheatstone and Gorgon.  If you have been following the progress of these LNG efforts you know cost overruns are not the only concern.  LNG bulls are worried exploding Asian demand for LNG may be hampered by a lack of conventional natural gas supply.  Coal seam gas and shale gas are seen as unconventional gas sources that have the potential to meet the demand.  And Chevron is getting into shale gas development as a result.

E = Equity to Debt Ratio is Close to Zero

Chevron’s debt to equity ratio comes close at only .07 or just 7%. Compare this with Exxon’s (NYSE:XOM) debt to equity ratio of 9.97 or 9.97%.  Despite their appetite for capital investments in exploration assets and their major commitment to LNG, their superior balance sheet certainly looks like they can handle it.

A = A Level Management Runs the Company

To their credit, Chevron management is not willing to rest on a profitable but potentially outdated business model.  They appear to have a keen eye on the future and although their downstream, or refining and distribution assets, have helped stabilize commodity price swings; going forward they are reducing the size of their downstream assets to upgrade their upstream or exploration and production assets, especially in the natural gas and LNG space.

In addition, their subsidiary company, Chevron Energy Solutions, is actively pursuing promising alternative energy sources from solar to bio-fuels to fuel cells to geothermal.  CES is already one of the largest installers of solar energy systems in educational institutions across the United States.

S = Support is Provided by Institutional Investors & Company Insiders

Chevron has 64% institutional ownership with the largest being State Street Corporation (NYSE:STT).  The top five holders also include big names like Vanguard Group, Capital World Investors, BlackRock (NYSE:BLK), and Fidelity Investments.  Chevron’s outstanding dividend history makes the company a perennial favorite of dividend investors, regardless of short term economic woes.

E = Earnings are Increasing Quarter over Quarter

Given the nature of the industry and the tumultuous times in which we find ourselves, this is not a metric Chevron can meet.  However, for the long term crowd, their average earnings growth over a ten year period stands at 14.7%.

T = Trends Support the Industry in which the Company Operates

Energy demand in developed countries is far from saturation and growing middle class populations in emerging markets provide substantial growth opportunities for well-managed integrated energy companies like Chevron for decades to come.  While the world awaits signs of cost effective alternative energy sources that have failed to deliver, the “smart money” is increasingly moving towards natural gas as a readily available and substantially cleaner energy source.

Conclusion

If you are looking for next big thing investing opportunities, natural gas may represent the place to be.  Despite falling prices here stemming from the shale gas revolution, there are a lot of experts predicting a golden age of gas as more and more economies start looking to natural gas as the cleanest energy source currently available on a large scale.  This trend got a big boost from the Japanese nuclear disaster at the Fukushima nuclear power station.

Do yourself a favor and spend some time researching the LNG projects underway in Australia.  Chevron is there big time with big money.  Skeptics view the enormous capex requirements of LNG terminals and hubs as evidence the golden age of gas may be dead on arrival; but they ignore the fact Chevron already has 80% of its equity investment in its Australian LNG facility at Wheatstone covered by long term contracts with Asian buyers who are grabbing up LNG output at a dizzying pace.  Chevron is a BUY and a BUY again and again.

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