Chevron: A Deeply Undervalued High Yield Dividend Aristocrat by Sure Dividend
Chevron (CVX) is the 2nd largest oil and gas corporation based in the United States.
The company has a $178 billion market cap, versus $344 billion for ExxonMobil (XOM). Chevron made a cool $17.3 billion in profits over the last 12 months.
Dividend investors will quickly notice the stock’s high dividend yield. Chevron currently has a dividend yield of 4.5%.
Unlike most high yield stocks, Chevron has a long history of dividend increases. Chevron is a Dividend Aristocrat thanks to its streak of 27 consecutive years of dividend increases.
Chevron is not a new company. It has proven itself over the last 145 years.
Chevron can trace its history back to 1879 when the Pacific Coast Oil Company was incorporated. In 1900, Rockefeller’s Standard Oil acquired the Pacific Coast Oil Company. Eleven years later, the Supreme Court forced Standard Oil to break up.
This break-up created Standard Oil of California – which changed its name to Socal. Socal grew from 1911 through 1977. In 1977 the company merged with 5 other domestic oil and gas businesses and renamed itself Chevron. The company has been known as Chevron ever since.
Recent events have not been kind to Chevron. The company’s stock is down nearly 25% this year. Chevron’s stock price decline is a direct result of falling oil prices.
Chevron is an integrated oil and gas business. The company operates both upstream and downstream businesses. The company’s downstream businesses tend to be more profitable with lower oil prices, while the upstream division is more profitable with higher oil prices.
Unfortunately for Chevron, the company is not evenly balanced between upstream and downstream. The bullet points below shows profits from each division (in millions) in the company’s first quarter of fiscal 2015 versus 2014.
- 2015 Q1 upstream profits of $1,560 versus $4,307 in Q1 2014
- 2015 Q1 downstream profits of $1,423 versus $710 in Q1 2014
As you can see, the upstream division is far more profitable than the downstream division when oil prices are high. When oil prices fall, the downstream division sees profits grow (doubling in this case), but downstream profit growth does not offset the steep profit declines in the upstream division.
Focus on Efficiency & Asset Sales
With falling profits in Chevron’s upstream division, the company is focusing on increasing efficiency. The company is targeting cost reductions between 10% and 30% in its upstream operations. The company is re-engineering its work processes and has found $900 million in reductions.
Chevron has also expanded its asset sale program. The company expects to generate another $5 billion from asset sales between now and 2017.
Chevron’s Growth Prospects
With low oil prices, investors can lose track of long-term growth prospects in the oil & gas industry. The macro growth drivers in the industry are population growth and rising global incomes – which stimulates energy demand.
The industry is projecting long-term growth. Chevron projects a 40% increase in energy demand (based at 2013 levels) by 2035. Gas demand is expected to increase by 45% and liquid demand is expected to increase by 20%.
So what’s the bottom line? Oil and gas is still a long-term growth industry.
Chevron has positioned itself to grow production over the next several years. The company is still targeting 20% production growth from 2014 through 2017.
Chevron plans to achieve this growth through large scale projects, including: Jack/St. Malo, Big Foot, Angola LNG, Gorgon, and Wheatstone.
The Jack/St. Malo project is also a deep water project located in the gulf of Mexico. The project has already started producing. At peak operating capacity, the Jack/St. Malo project will add over 100 MBOED to Chevron’s operations.
TheBig Foot project is also a deep water operation located in the gulf of Mexico. The project was expected to begin production in 2015, but is experiencing delays. Once complete, The Big Foot project should add around 80 MBOED to production for Chevron.
Chevron is also experiencing fixable issues in its Angola LNG project. The project has had several setbacks and delays including fires and various technical issues. The Angola LNG project will contribute about 60 MBOED to Chevron when it starts operating at peak efficiency. Chevron expects the Angola LNG project to restart production in the 4th quarter of 2015.
The Gorgon and Wheatstone LNG projects are both located off the northwest coast of Australia. The projects are the centerpiece of Chevron’s production growth plan. The Gorgon project is 90% complete, and the Wheatstone project is 60% complete. Production will ramp from these projects through 2020. At their peak, the projects are expected to add over 450 MBOED to Chevron’s production.
Expected Total Returns
Over the last decade, Chevron has grown earnings-per-share at an average of 7.5% a year. The company is expected to grow production at around 7% a year to 2017. Chevron will likely continue to grow earnings-per-share around 7.5% a year, in line with its long-term historical average.
The company’s earnings are highly volatile due to dependence on the price of oil. If oil prices rise, Chevron’s earnings-per-share will surge higher. The company’s 7.5% expected long-term earnings-per-share growth combined with its current 4.5% dividend yield give investors expected total returns of around 12% a year.
Final Thoughts
Chevron is currently trading at just 7x its peak earnings (from 2011). The company appears deeply undervalued at this time. Chevron is cheap due to oil price declines. If oil prices rise, Chevron shareholders could see large gains from both increased earnings and a higher price-to-earnings ratio.
Chevron ranks highly using The 8 Rules of Dividend Investing. The company’s extremely high dividend yield, low valuation, and solid growth prospects should provide market-beating returns for dividend growth investors who can withstand the stock’s high volatility.
