The oil and gas industry has been dramatically expanding over the past few years, particularly in the United States and emerging markets. In fact, the U.S. is expected to overtake Saudi Arabia and Russia to become the world’s largest oil producer by the second half of this decade, according to the International Energy Agency. One of the leading names on the oil front has long been Chevron (CVX), which is one of the largest crude producers in the U.S. [for more oil & gas news subscribe to our free newsletter].
Chevron is a global energy company operating in over 30 countries and regions around the world. The firm has segments dedicated to petroleum chemicals, mining, power generation, and energy services. The company’s upstream operations consist of exploring, developing, producing and transporting crude oil and natural gas, while its downstream operations consist of refining crude oil into petroleum products and marketing/transporting them to key end-markets worldwide.
CVX generates the majority of its revenues from the U.S. versus any other individual country, producing 647,000 barrels per day of oil equivalent upstream and selling 1.2 million barrels per day of refined products downstream in 2012. By comparison, total aggregate international production amounted to 1.96 million barrels per day upstream and 1.55 million barrels per day downstream. These operations generated revenues of $26.2 billion in 2012, which was down 3% from $26.9 billion in 2011, due to lower energy prices [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].
In 2012, Chevron made significant progress on its Gorgon and Wheatstone LNG projects in Australia, added six additional natural gas discoveries offshore, expanded its resource acreage into five new countries, and completed an asset exchange that increased its interest in Carnarvon Basin fields upstream. Meanwhile, the company completed a multi-year plan to streamline its asset portfolio downstream, began commercial production at a petrochemical facility in Saudi Arabia and focused on other high margin product lines.
The oil and gas industry is undergoing a major shift, as the U.S. aims to become nearly energy independent over the next couple decades. Greater supply and stable demand would normally lead to lower upstream prices for crude oil and natural gas, but emerging markets have picked up the slack lately.
In particular, China’s growth has led to robust demand that more than offsets the slowdown in the U.S. and developed markets. But, some are concerned that China may be alone, accounting for over 40% of the rise in demand. Beyond China, the Middle East and former Soviet Union account for most of the remaining increase, but these countries are heavily dependent on oil revenues themselves to sustain their growth. As a result, China’s slowdown could have a bearish impact on crude oil prices in the future.
Upstream pricing and margins depend largely on global and regional supply and demand balance, and changes in the price of crude oil and natural gas. Most of Chevron’s business in these areas is located on the West Coast of North America, the U.S. Gulf Coast, Asia and southern Africa [see also California: America’s Next Oil Boom?].
While Chevron experienced declines in mid-2012 due to declines due to disruptions caused by hurricane Isaac and refinery accidents, the company’s overall performance was strong with industry-leading earnings per barrel upstream and very competitive earnings per barrel downstream. Strong cash flow also enabled the firm to invest in major capital projects and acquire new resource opportunities, while also returning some value to shareholders via a dividend raise and a continuation of its share repurchase program.
Risks and Rewards
Oil and gas companies face a number of different risks, including both commodity risks and supply/demand uncertainties associated with refining operations. Crude oil and natural gas prices are affected by a number of factors, including general economic conditions, industry inventory levels, production quotas imposed by the Organization of Petroleum Exporting Countries (OPEC), weather-related damages, competing fuel prices and geopolitical risk, among other things. Investors can monitor many of these events by watching global oil and gas price movements and inventory levels reported by the EIA and other bodies.
Investors willing to accept these risks and others can benefit from a relatively stable stock with great exposure to the oil and gas industry. With a strong dividend yield, share buyback program, and low beta coefficient, the stock is perfect for many risk-averse portfolios seeking exposure to a relatively volatile industry. Moving forward, the company has many promising projects, including increased exposure to the LNG business that could pay off for investors, while its existing projects maintain very competitive earnings per barrel of oil equivalent extracted [see also 13 High-Yielding Commodities For 2013].
Chevron’s stock price has moved largely higher over the past five years, increasing over 40% and paying a dividend that has risen from $0.58 in 2008 to $0.90 in 2013. While much of this movement was due to rising energy prices and greater reserves, the company operates relatively smoothly with a strong 3% dividend yield, expanding share buyback program that reached $5 billion in 2012, and somewhat quiet 0.80 beta coefficient that makes it an ideal blue chip stock for many retirement portfolios and institutions.
On a technical level, the stock appears to be overbought at its current levels, after reaching its prior highs from back in late-September and early-October. Meanwhile, key technical support levels remain in place at the 50-day moving average ($109.78), 200-day moving average ($107.27) and lower trend line ($104.00), if there proves to be downside from these levels. Upper resistance levels include two pivot points at R1 ($119.75) and R2 ($123.01), if the stock manages to break out from its $117.50 trend line and prior high.
The Bottom Line
Chevron is one of the world’s six supermajor oil companies, consistently ranked as one of America’s five largest corporations in the Fortune 500. With diverse operations around the world, a strong dividend yield, growing share buyback program and a low beta coefficient, the company is held by many risk-averse portfolios looking for exposure to energy. But, investors should still be aware that its share price is susceptible to the movements of crude oil, which can prove volatile at times and may be set to decline moving forward.
Disclosure: No positions at time of writing.