Is Chevron’s Stock Still Attractive After Earnings?

With shares of Chevron Corporation (NYSE:CVX) now trading at $102.50, is CVX 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 Stock’s Movement

Chevron posted fairly lackluster earnings at the beginning of November. Revenue fell 8.2 percent year over year to $56 billion, while net income dropped 32.3 percent to $2.69 per share, and fell short of estimates on both fronts.

E = Equity to Debt Ratio is Close to Zero

While it’s not the best in its class, Chevron’s debt-to-equity ratio of 0.09 still looks pretty good. Exxon Mobil (NYSE:XOM) edges in with a debt-to-equity ratio of just 0.07. British Petroleum (NYSE:BP) tends to play a slightly more capital-intensive game, and clocks in with a debt-to-equity ratio of 0.42.

Chevron is sitting on total cash of $21.58 billion, and total debt of $12.34 billion. Oil and gas plays in North America have been heating up for a while, and this cash could soon translate into additional shale assets.

Exxon Mobil, which has a market cap nearly twice the size of Chevron’s, has just $13.06 billion in total cash, with $12.42 billion in total debt. Exxon Mobil’s cash pile looks a little depleted this quarter after some oil and gas shale acquisitions, namely a $3.14 billion purchase of Celtic Exploration and a $1.6 billion purchase from Denbury Resources (NYSE:DNR). Chevron may have some catching up to do.

BP has $16.36 billion total cash and $41.31 billion in total debt.

T = Technicals on the Stock Chart are Not Strong

As of November 12, the stock price is 4.48 percent below its 20-day simple moving average, or SMA; 6.80 percent below its 50-day SMA, and 0.76 percent below its 200-day SMA.

Since the beginning of 2012, the stock price has been in a downward trend, losing 4.6 percent of its value this year to date, and 0.8 percent year over year.

This compares to a 0.5 percent year-to-date gain for Exxon Mobil and an 8.1 percent year-to-date loss for BP.

The stock is trading in a 52-week range of $92.29 to $118.53 per share.

T = Trends Support the Industry in which the Company OperateOil Barrels

There’s a lot of thinking being done about the future of the oil industry. Oil prices dropped about $6 dollars per barrel in the third quarter of 2012 compared to 2011, and the decline has hurt oil companies across the board.

The public International Energy Agency Oil Market Report points out that with the fiscal cliff looming in the United States and global economic outlook still weak, oil prices hit four-month lows during October. The forecast for fourth-quarter global oil demand was cut by 290,000 barrels per day to a total of 90.1 million bpd.

The increasing role of natural gas in the energy mix is changing the types of acquisitions supermajors are making. Hydraulic fracturing and horizontal drilling have made accessing shale oil and gas reserves much more financially feasible, and as a result production in North America is ramping up. The IEA predicts that North America will become the world leader in oil production by 2020. Exporting U.S. oil is slated to look very attractive in the coming future.

By successfully drilling in Australia and Indonesia, and a buying land in Poland and Bulgaria, Chevron has strengthened its global position. Oil and gas companies have been dubious about inland European production, but advancing technology makes shale deposits there easier to access. The vast majority of demand for oil and gas heading through 2035 is expected to come from China, India, and other rapidly industrializing nations. OECD nations are expected to offset increased energy demands with higher efficiencies and renewable energy. Strong production facilities in Australia and Indonesia can help Chevron get ahead of U.S. exports.

Conclusion

As any oil supermajor does, Chevron suffers environmental litigation. Perhaps lost among the recent Deepwater Horizon disaster, Chevron faces up to $22 billion in damages from officials in Brazil because of the Frade oil spill. A judge in Argentina also recently embargoed $19 billion of Chevron’s assets in the country because of an ongoing lawsuit related to environmental damages caused by Texaco, which Chevron bought in 2001.

While the third quarter looked weak, the fourth quarter is expected to be strong with earnings estimates coming in around $3.15 per share. However, concerns about production are high and it looks likely that levels will remain low heading into the fourth quarter.

Because of this, Chevron is a Wait and See. Those with faith in a North American oil and gas boom, and who are attracted to Chevron’s war chest and stellar cash flow, could look at the stock as an outperform in the long run.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More from The Cheat Sheet