Chevron is a global energy corporation with operations in more than 180 countries. Company employs around 62 000 people (half of it in US). During a last conference call company announced that is planning to cut about 11% of stuff due to difficult market conditions.

Financial results for the last quarter, nine months and split for segments is presented below:

Chevron results

(source: Chevron 3Q Earnings Press Release)

As we can see the biggest problem is with Upstream, both in US and International, where profits plummeted due to low oil price. Company reacts on low oil prices through:

  • Cost optimization
  • Sales of non-strategic assets (guidance $15B in years 2014-2017)
  • Reduction of CAPEX

The priority is to pay dividends.

 

As it comes to financials (estimates):

Market cap ~ $169B

Net debt ~$23B

Payout ratio ~100% (volatile due to cyclically low earnings)

ROE ~5.5% (see above)

Beta = 1.26

Dividend yield 4.8% (!!)

 

Estimated valuation ratios:

P/E = 19.5 (should rise)

EV/EBITDA = 8.9 (should rise)

 

With cyclical companies and low oil prices looking at valuation ratios is in my opinion senseless. I look at net debt – situation of company is rather stable. Moreover company is generating positive operating cash flow. All this makes company stable and with growing oil prices share price should go up. The case is dividend – is company able to raise dividend? I think so, company is The Dividend Aristocrats (~30 years) and situation in company is not as bad as it might seem. Company is stating that free cash flows covers dividend by 2017.

Current dividend yield 4.8% is high from historical point of view (in September it was even 5.5%, but generally speaking company was paying around 3% yield. There are many articles where investors write how good the current yield is, but for me it is no hurry. Oil is falling.

Drawdown risk:

Chevron drawdown

Buying shares on 40% drawdown from historical point of view is a good idea. This means I would definitely buy at $76. Nevertheless even with current prices valuation from dividend yield perspective is promising. September it was a good time to buy shares – I hope such levels will come back for me to buy.

 

Comparing to Exxon Mobil:

  • A little bit higher debt to market cap
  • Higher dividend yield
  • Comparable valuation
  • Similar level on drawdown analysis
  • Very high long term correlation (around 0.88, performance of Chevron a little bit higher over long term)
  • Risk on dividend higher in Chevron in long term (in my opinion), stronger cash flows in Exxon, lower payout ratio in Exxon

 

Summing up – I like both XOM and CVX, nevertheless I think I would rather buy XOM. Although dividend yields are lower now I think that company can increase its’ dividends faster. In short term it is play on oil prices – by now I see no reason to buy shares and I am waiting for “New Year sales” – my target is to buy XOM for $73.

 

Disclaimer CVX – no position