Chevron Inc. (CVX - Free Analyst Report), is the second-largest oil company in the United States. In 2010, it produced 2.8 million barrels of oil equivalent per day, with about 72% of that volume produced outside the United States. Chevron has fully-integrated petroleum, chemical, and mining operations, as well as power generation and energy services. Upstream operations consist primarily of exploring for, developing, and producing crude oil and natural gas. They also consist of processing, liquefying, and transporting liquid natural gas (LNG), Chevron transports crude oil by major international pipelines, and stores and markets natural gas. Downstream operations (the Refining and Marketing business) consist primarily of refining crude oil into petroleum products, and marketing crude oil and refined products. It also manufactures and markets commodity petrochemicals, plastics, and fuel and lubricant additives. The Upstream and Downstream businesses account for 98% of sales. The remaining 2% consists of chemical manufacturing, geothermal energy production, and power generation. 

Originally called the Pacific Coast Oil Co., Chevron became the Standard Oil Co. of California and then became known as Chevron Inc. when it acquired Gulf Oil in 1984. In 2001, Chevron merged with Texaco, and in 2005, it acquired UNOCAL.  The company is very well diversified geographically, with wells in North and South America, Australia, Asia, Europe, and Africa.

Upstream activities in the United States are concentrated in California, the Gulf of Mexico, Louisiana, Texas, New Mexico, and Alaska. Chevron’s “other” America holdings are in Canada, Greenland, Argentina, Brazil, Columbia, Trinidad and Tobago, and Venezuela. In Africa, Chevron has E&P operations in Cameroon, Chad, Angola, Democratic Republic of Congo, Liberia, and Nigeria. Net oil equivalent production in Africa is about 470,000 barrels of oil a day, with the majority stemming from wells partly- or fully-owned in on- and off-shore Nigeria. Around 255,000 barrels of oil equivalent per day are lifted from this vicinity. Most future potential reserves are thought to come from off-coast Angola. In Asia, Chevron has a non-operating working interest in the Azerbaijan International Operating Company (AIOC), its largest interest in this region. It also has holdings in Bangladesh, Cambodia, China, Kazakhstan (where most proved reserves have been found), Indonesia, and Myanmar. About 225,000 boe/d comes from Indonesia, which is thought to have the greatest reserves in this part of the world. In Australia, Chevron mines about 110,000 mboe/d, and in Europe, proved reserves of shale gas in Poland and Romania have been found to be very extensive. The company’s Dutch-owned North Sea wells are becoming more difficult to extract oil and gas from due to rough seas and deeper fields.

In the Downstream (Refining and Marketing) operation, the company has a refining network capable of processing more than two million barrels of crude oil per day. The company has 17 refineries worldwide. Six of them are in the United States, three in Europe, and eight others in various parts of the world are affiliates. Average crude oil distillation capacity for the past three years is 92%. The company is continually modifying and upgrading its refineries for optimal use. Some of them, such as the Pembroke plant in the United Kingdom, are being dismantled. In the Marketing business, the company markets petroleum products under the Chevron, Texaco and Caltex brands. In the United States (primarily in the western and southern states), Chevron markets its product through approximately 8,250 Chevron and Texaco branded service stations. About 500 of these are company owned or leased stations. Outside the United States, CVX supplies about 11,300 branded service stations, including affiliates in British Columbia, United Kingdom, Latin America and the Caribbean using the Texaco brand. In the Asia-Pacific region, it uses the Caltex brand. CVX also supplies commercial aviation fuel to about 200 airports worldwide, and markets an extensive line of lubricant and coolant products under the Havoline, Delo Ursa, Taro, and Meropa names. 

Chevron’s Growth Strategy

Oil and gas prices remain the primary driver behind Chevron stock’s valuation. With oil prices unlikely to rise much in the near future due to the stagnant global economy, and gas prices remaining low as a result of refining overcapacity, we don’t see CVX stock moving up much in the near term. And although the ramifications from recent oil spills are receding, they haven’t placed oil companies in a favorable light. Not that they were viewed in a particularly rosy light in the first place. On the plus side, Chevron uses oil as a major raw material for the production of its refined products (such as diesel, jet fuel, home heating oil, and truck fuel). As such, low oil prices should help the company widen the profit margin in its R&M operation. Still, refining margins are liable to stay weak for some time due to excess capacity. To combat this, CVX is focusing on improving returns in the refining business by exiting retail markets in countries where it sells minimal volumes, reducing downstream capital spending by 23%, to $2.4 billion in 2010, and selling off refining facilities and their associated assets.

On the E&P side, the company is concentrating more on its natural gas production. Its liquefied natural gas projects in Wheatstone and Gorgon, Australia should enhance CVX’s production mix toward natural gas. By 2014, we look for annual production growth to accelerate from 1%, to 4%. This strategy is designed to capitalize on increasing energy demand from Asia. By 2017, natural gas production is expected to comprise 42%, of Chevron’s total, compared to an estimated 30% in 2010. Meanwhile, Chevron has a number of promising projects on tap that should replenish reserves. These are the Tahiti field in the Gulf of Mexico, The Frade field off the coast of Brazil, Tombua-Landana and Mafumeira in Angola, and Agbami in Nigeria.

Potential Pitfalls

When Chevron bought Texaco, it inherited a $27 billion lawsuit arising from environmental damages that the Ecuadorian government claimed Texaco was responsible for. Typically, these lawsuits drag on for many years, and this one looks to be no different. The amount of the eventual liability cannot be evaluated accurately. However, it is assumed Chevron will have to ante up a fair amount. This scenario has probably already been factored into the stock price.  Like its fellow supermajor oil peers, Chevron is finding it increasingly difficult to add to its reserves in a world of shrinking global resources. Much of the remaining, relatively easily obtainable oil and gas deposits, are increasingly in the hands of sovereign powers and national oil companies. Unless these entities want Chevron’s technical expertise, they are unlikely to invite it to the party. This means that for the most part, Chevron is having to take on increasingly risky and costly deepwater drilling projects (like the ones in the Gulf). Furthermore, should oil and gas prices languish at the current relatively low levels for a multi-year period, Chevron’s return on investment will sink. We doubt, though, that this scenario will materialize. Lastly, some of the countries that the oil giant drills in are politically unstable, where the threats of internal disruptions are high as well as potentially violent.

In a Nut Shell

The ultimate key to Chevron’s fortunes lies in a global increase in demand for energy. The oil and gas business generates tremendous profits when the price of these commodities rises. Chevron is well capitalized, with almost $18 billion in cash on the balance sheet (as of 6/30/11), strong cash flow generation, and optimal financial leverage. All this earns the company an A++ Financial Strength rating, and the stock a top-notch Safety rank. Last, but by no means least, Chevron pays out a handsome and growing dividend. Having been tarred with the same brush as many of its peers due to the BP oil spill, and with energy prices at relatively low levels, we think the stock currently offers investors an appealing entry point for long-term stock price appreciation.


At the time of this Article’s writing, the author didn’t have any positions in any of the companies mentioned.