1. The Fund
Chevron Corporation
Chevron Corporation is a leading competitor among oil companies based on
their high margins and returns on capital. Chevron Corporation has been
battered by lowered oil prices but will bounce back in the coming years.
Overall pitch: buy now and hold
Investment Thesis:
• First Point: Oil cycles indicated by the IEA show that there are early indications
of an eventual drop in global oil supplies which could push oil prices higher by 2017.
As prices of oil reaches its lowest point, we can jump into Chevron in the dip
(approximately $76) and ride the wave into a higher ROI with consistent dividend
payments.
• Second Point: According to the Wall Street Journal and SeekingAlpha.com, in Q4
15’, Chevron will ramp-up their on-going projects including Tubular Bells in the Gulf
of Mexico, the Bibiyana expansion in Bangladesh and Escravos gas-to-liquids facility
in Nigeria. Moreover, in Australia, Gorgon and Wheatstone liquefied natural gas
projects are expected to be operating in 2017, of which will raise Chevron’s
production by approximately 400,000 BOE (amount of energy per barrel of oil) per
day and release additional cash flows.
• Third Point: Chevron Corporation has a track record of taking care of their
investors. Barron’s newspaper described Chevron’s report on EPS shows 6.46. Their
dividend indicated gross yield is 5.58%. Chevron has a 7.3% return on assets and
12.5% return on equities. Also, Chevron’s net debt ratio is very low at around 11%.
Since oil is dollar-priced commodity, it gets expensive as interest rates rise. Chevron
has a solid outlook based on the FED’s decision to keep the interest rate near zero.
Analyst:
Julian Navarrete
jnavarrete@drew.edu
September 19, 2015
NYSE, CVX, $76.12
Price Target: $95.00
Investment: $2,500.00
Key Statistics
Market Cap $144
billion
Shares
Outstanding
1.882
billion
Beta 1.1
Dividend (Yield) 5.51%
Financial Highlights
Revenue (ttm) 191.76 billion
EBITDA (ttm) $38.26 billion
Profit Margin
(Q2, June 15’)
1.65%
Return on
Equity (ttm)
12.5%
Debt to Equity
(ttm)
0.2058
2. The Fund Chevron Corporation
Upside (Key Catalysts):
• First reason why the stock might do well in the future: By 2017, oil prices will have risen well above recent
prices due to a limited supply (partially due to OPEC activity). The benefits Chevron will receive from the
higher oil prices and stronger demand will spill over to investors.
• Second reason why the stock might do well in the future: Large projects that are headed by Chevron are in
line to release new cash flows, in turn making an influential impact on Chevron’s financial report. Gorgon
and Wheaton LNG projects in Australia are of the more recent projects.
• Third reason why the stock might do well in the future: Chevron Corporation is focusing on being selective
in their investments amid the looming struggles in the energy sector. CVX announced a 2015 capital and
exploratory budget of $35 billion, 13% lower than the year before. Also, company assets have continued to
grow while its current assets excluding inventory and current liabilities is 1.07x, showing that the company
has sufficient cash to cover its short-term debts (see CVX Balance Sheet below).
Downside (Key Risks):
• First reason why the stock might do poorly in the future: Since oil is a price commodity, the possibility of
the FED raising interest rates can deter Chevron’s growth.
• Second reason why the stock might do poorly in the future: Chevron could continue to be affected by
liquids-linked production and high capital spending requirements. This may delay the release of cash flows
if it takes longer to activate the projects.
• Third reason why the stock might do poorly in the future: Chevron Corporation is subjected to growing
demands from green and investor activists. In particular, the 2015 United Nations Sustainability Summit
can push harder to phase out fossil fuels, hurting Chevron’s business foundation for the future.
Potential Hedge:
• To protect ourselves from losses, I suggest we prepare our investment with the married put strategy.
Our strike price should be discussed but I’d suggest no more than 20% of our initial investment.
