Chevron's Clearly Your Best Big Oil Bet

It's tough to analyze Chevron (NYSE: CVX  ) , the second-largest of the U.S.-based major oil companies, behind only ExxonMobil (NYSE: XOM  ) , and not emerge with the conviction that the company deserves to be a core holding in Foolish energy portfolios.

Oh sure, Exxon and Netherlands-based Royal Dutch Shell (NYSE: RDS-B  ) are hardly chopped liver, but Chevron boasts some special assets that, in my mind, make the company a standout in the group. For instance, its balance sheet is hardly short of cash, its per-barrel profitability is exemplary, its dividend is solid, and its natural gas concentration is overseas, where prices have fared far better than in the U.S.

A year-over-year dip, but a major beat
As was the case with most of the rest of the industry, however, Chevron's net income for the second quarter slid to $7.21 billion, or $3.66 per share, compared with $7.73 billion, or $3.85 per share in 2011. Nevertheless, the latest per-share figure topped the consensus expectation of analysts who follow the company by a whopping $0.42. The company's top line came in at $60 billion, versus $67 billion for the comparable quarter a year ago.

In the upstream sector, George Kirkland, the head of the company's exploration and production operations, noted that, thus far in reporting season, the company is nearly $7 per barrel ahead of its peers in per-barrel margins, which were about $26 per barrel in the quarter. At the same time, however, Chevron's oil-equivalent barrels of production averaged 2.63 million BOE a day for the first half of the year. That figure compares to 2.68 billion daily BOE to which management guided for the full year in January. The average price realization thus far in the year is $114 Brent per barrel.

According to Kirkland, here are "four key drivers" that will affect Chevron's full-year production results: First, there has been a months-long shut-in at the Frade field offshore Brazil in the face of a pair of oil spills in the Chevron-operated project. Second, the company is about to embark on its initial six-week turnaround (maintenance stoppage) at the giant Tengiz field in Kazakhstan. Third, Chevron has experienced commissioning delays at the Angola LNG operation. Finally -- and positively -- are the startups of several projects vis-a-vis expectations.

Where it's working
Regarding areas of conventional exploration and production for the year, the company will invest nearly $3 billion in the Gulf of Mexico. Indeed, in the recent lease sale, it appears that Chevron was high bidder for 15 blocks each in the deepwater and on the continental shelf. Furthermore, it has announced its fourth discovery in the Carnarvon Basin of Australia. Other test areas on the company's docket for the year include South America and West Africa.

Highly unconventional
As for unconventional plays, Chevron is pursuing projects in a number of areas, including the Permian Basin and the Marcellus shale of the U.S. It's also conducting unconventional exploration in the Duvernay of Canada, Poland, Argentina, and China. In addition, it's been awarded a tender in Ukraine that gives it the right to negotiate a production-sharing contract for 1,600 acres.

The company has announced that it will proceed with the development of the Lianzi field, which straddles a unitized offshore zone between the Republic of Congo and the Republic of Angola. Development of the field, which is located about 65 miles offshore, is likely to involve an expenditure near $2.0 billion. At the same time, the company will spend another $500 million to increase its natural gas production in Bangladesh by 2014.

Its hike downstream
Downstream, Chevron earned $1.88 billion, pushed along by the favorable combination of a 7% decline in Brent crude, which serves as the benchmark for two-thirds of the world. Profits from the sector included $200 million from the sale of a South Korean power business, along with other assets.

Chevron is in the process of developing a pair of major Australian LNG projects, on which it serves as operator. The Wheatstone is well into the development stage, following a final decision on the project nearly a month ago. The larger Gorgon project is further along -- currently about 45%. On the latter, Kirkland said, "We are making good progress on our 2012 milestones."

Chevron hardly will be hindered by a less-than-robust balance sheet going forward. The company finished the quarter with about $21.5 billion in cash and equivalents, along with marketable securities. When weighed against $10.2 billion in short- and long-term debt, its net cash position just might signal acquisition activity in the reasonably near term.

CFO Pat Yarrington concluded management's formal remarks on the call with analysts by saying:

An investment in Chevron offers many advantages: a very compelling growth story beginning mid-decade; hugely competitive cash and earnings margin; margins we believe will be supported in the future by the quality of investments we're making today; and the sustained growth pattern on dividends, which are yielding 3.3%. We believe we are well positioned for strong cash generation in the years to come, and with that cash generation, our capacity to increase dividends and maintain peer-leading total shareholder returns is enhanced.

The Foolish bottom line
Yarrington obviously believes Chevron is the most attractive investment among the world's major oil companies. I'm hard-pressed to disagree. And while I've suggested that a Foolish portfolio would benefit from the inclusion of such oil-field leaders as Schlumberger and National Oilwell Varco, I also believe they'd be inclined to flourish with inclusion of Chevron shares.

At the very least, I urge Foolish investors to include Chevron in their versions of My Watchlist.

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chevron and National Oilwell Varco. The Motley Fool owns shares of ExxonMobil and National Oilwell Varco. The Motley Fool has a disclosure policy.
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