CHEVRON, THE INTEGRATED OIL GIANT>, marks the new year with a changing of the guard. Chairman and CEO David O'Reilly, 62, has retired after 41 years at the company, including 10 at the helm, and has handed the reins to John Watson, 53, a veteran of a mere 29 years.
Such continuity is only one of Chevron many assets, although it is likely to prove critical as the San Ramon, Calif.-based company embarks on numerous exploration projects around the world, and seeks to replace reserves at a time when that has proved difficult and costly.
Chevron also benefits by being one of the "oiliest" of the world's major energy producers, as crude oil prices, up 75% in 2009, to nearly $80 a barrel, are expected to keep climbing in 2010. Natural gas, in contrast, ended last year with a gain of about 6%, and the outlook for this year is uncertain.
Oil exploration and production contributed 86% of Chevron's profit in 2008, and crude accounted for two-thirds of the company's 11.2 billion barrels of oil-equivalent reserves at the end of that year. At rival ConocoPhillips, oil accounted for 59% of total reserves, and at industry leader ExxonMobil, it's 49%, now that Exxon has agreed to acquire XTO Energy, a producer of natural gas. Chevron also has one of the industry's better exploration-growth profiles.
Given these and other attributes, a growing roster of oil analysts and investors are upbeat about Chevron's prospects -- at the wellhead and in the stock market -- in 2010. The company's fans think the shares, now 77.21, could rally more than 20% in the next 12 months.
Investors also collect an annual dividend of $2.72 a share, for a current yield of 3.5%. That payout, totaling about $5.5 billion, makes Chevron one of the largest dividend payers among the S&P 500's members.
ALL THE BIG OIL COMPANIES FACE similar challenges, including rising costs for equipment, services and refinery upgrades. But the group's stock performance diverged sharply in 2009. Shares of European integrated oil companies rose as the euro strengthened against the dollar, while shares of the U.S. majors didn't fare as well. Chevron was able to cut costs ahead of schedule; its shares ended the year up only 8%, although they have rallied about 37% from the market's low in March.
Bank of America Merrill Lynch calls Chevron its top pick for 2010 among the major integrated oil companies. It has a price target of $95 -- roughly 23% above the current price. The bank is assuming, perhaps conservatively, that oil prices will rise to about $85 per barrel in the coming year, and that natural gas will hover around today's price of $6 per million British thermal units.
Analysts in general are upbeat about Chevron's earnings prospects: They expect the company to net $16 billion, or $7.75 a share, in 2010, on revenue of $185 billion. That is up from an expected $5.06 a share in 2009, on estimated revenue of $163 billion. As profits improve, Chevron could resume buying back shares, and perhaps boost its dividend.
"One of our favorite integrateds is Chevron," says Bryan Bell, an energy analyst at Federated Investors. "It has one of the strongest organic growth profiles among peers, more exposure to oil...and lower relative exposure to U.S. refining."
While Exxon has made a big bet, with its XTO purchase, on domestic natural-gas shale plays, Bell says Chevron "doesn't need to do a big deal" because it has such good "organic prospects."
In recent presentations, Chevron has highlighted six major capital projects in which $25 billion invested in recent quarters resulted in peak production in excess of 900,000 barrels per day of oil-equivalent. To put that in perspective, Chevron's overall production declined by about that much in 2008 in the face of reduced demand. In all, the company has about 40 major projects around the globe.
In 2008, about a quarter of Chevron's production was centered in the U.S. Some 10% was in Kazakhstan, and slightly less in Indonesia. The company has significant projects in Thailand, the Gulf of Mexico and off the coasts of Africa and Australia.
FOR ALL ITS STRENGTHS, CHEVRON historically has traded at a deep discount to Exxon. Some say that discount could narrow in coming years, even though Chevron's average costs for finding and developing oil and gas and replacing its reserves are above those of other big oil companies. Barron's was bullish on Exxon in a recent cover story ("What A Gusher!," Nov. 16).
Based on 2010 estimates, Exxon fetches 11.9 times expected earnings, and Chevron, 10 times. BofA Merrill also focuses on enterprise value (market value plus net debt) to estimated 2010 debt-adjusted cash flow, noting Chevron currently commands 4.7 times EV/adjusted cash flow. That's below its historic range of five to eight times, and deserves to be closer to six times, the bank contends. Exxon trades for 8.3 times EV/adjusted cash flow.
Like all E&P outfits, Chevron is vulnerable to falling oil prices, only more so. While the broad view on Wall Street is that crude will rise modestly in 2010 -- it peaked at around $147 a barrel in July 2008 -- some see prices falling if the economy stays weak or the dollar rises. Deutsche Bank analyst Paul Sankey has a 2010 price forecast of $65 a barrel, based on a stronger dollar. About three-quarters of the company's profit comes from overseas.
Lower oil prices aren't investors' only fear. The company recently announced a $21.6 billion capital-spending plan for 2010, 5% below 2009's spending level. Refining margins are bad, though they may be bottoming. But most concerns arguably are reflected in the shares.
Perhaps most worrisome is Chevron's ongoing legal dispute in Ecuador, where Texaco, which it purchased in 2001, is accused of contaminating rain forests with toxic petroleum waste. The case could result in $27 billion of damages for Chevron, but any restitution probably wouldn't be due in a lump sum. And Chevron attorneys have presented evidence of bribery in the trial.
"While the Ecuador litigation will likely add volatility to Chevron stock in 2010, we believe operational improvements and [an] advantaged portfolio will continue to drive outperformance," Morgan Stanley analyst Evan Calio wrote recently.
Chevron declined to make O'Reilly or Watson available for comment.
AS OUTGOING CEO, O'REILLY will be remembered as the dealmaker under whom Chevron completed its $35 billion combination with Texaco and scooped up Unocal for roughly $18 billion in 2005. The first acquisition gave the company a major refinery operation, and the second, significant resources in Asia, to the detriment of competing bidder Cnooc, part of China's national oil company.
Refining, transporting and marketing fuels -- some of it through its more than 22,000 retail gasoline stations -- accounted for 13% of Chevron's profit in 2008, although it contributed an outsized 72% of revenue. In an effort to boost tight refining margins, the company is investing in refineries that allow it to use local, low-cost oil and gas production. Chevron owned seven refineries at the end of 2008, and had interests in 10 more, mostly overseas. Likewise, roughly 60% of its gas stations are located overseas.
Chevron is positioned well to serve Asia's growing thirst for fuel, with refineries in Richmond and El Segundo, Calif., as well as Singapore, Thailand and South Korea, where it has announced plans to expand. The company has worked to improve U.S. refinery output and to increase the use of cheaper "heavy" crude to improve margins.
FULLY 80% OF CHEVRON'S spending, however, is directed toward finding oil and gas. While oil exploration and production dominates, liquefied natural gas, or LNG, is apt to play a big role in the company's future. About 30% of Chevron's natural-gas production was U.S.-based in 2008, and more than a third was spread across Asia.
Chevron plans to invest $37 billion in western Australia to produce gas that could come online in 2014 from the Gorgon region, which is thought to hold more than 6 billion barrels of oil equivalent. That kind of investment is so big, oil expert Daniel Yergin tells Barron's, that it's like a government stimulus package.
Expenses for finding and extracting oil and gas will continue to rise, as reserves become harder to find and more difficult to bring to the surface. But a host of new exploration projects, growing international exposure and an "oily" profile could leave Chevron poised to prosper under its new CEO, even if oil prices don't move up much from here.
The Bottom Line:
Chevron's shares could rally about 20%, to 95, in the next year, as oil prices climb and new exploration projects come onstream. Profits are expected to rise more than 50% in 2010.