Is Chevron Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Chevron (NYSE: CVX  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Chevron's story, and we'll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?
  • Dividends: are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Chevron's key statistics:

CVX Total Return Price Chart

CVX Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

18.5%

Fail

Improving profit margin

20.4%

Pass

Free cash flow growth > Net income growth

(100%) vs. 42.6%

Fail

Improving EPS

47.1%

Pass

Stock growth (+ 15%) < EPS growth

97.6% vs. 47.1%

Fail

Source: YCharts. * Period begins at end of Q2 2010.

CVX Return on Equity Chart

CVX Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

(2.8%)

Fail

Declining debt to equity

36.2%

Fail

Dividend growth > 25%

38.9%

Pass

Free cash flow payout ratio < 50%

Really high **

Fail

Source: YCharts. * Period begins at end of Q2 2010.
** Chevron's trailing 12-month free cash flow is $3 million, effectively zero at this scale.

How we got here and where we're going
Chevron doesn't come through with flying colors, as it mustered only three out of nine possible passing grades. One main source of that weakness is falling free cash flow, which has diverged significantly from net income over the past three years, and which may not be able to sustain dividends at the present level. In addition, the company raised a chunk of new long-term debt in 2012, which reflects badly in our analysis. Will Chevron be able to move past these weaknesses, or is the oil and gas supermajor drilling a dry hole for investors today? Let's dig a little deeper to find out.

News of a possible military strike on Syria has forced Chevron and other oil companies to abort under way projects in the region recently. Although Syria is small producer of oil compared to other Middle Eastern countries, rising tensions and potential imbalance are seen as probable disruptions to oil outflow in the Middle East. In the past few days, the anticipated Syrian crisis has already sent crude oil and natural gas prices soaring, which could more than offset the reduced output from aborted projects in the near term.

Fool contributor Dan Carroll notes that Chevron has also recently pulled out a liquefied-natural-gas project in Nigeria after enduring delays. However, the company should continue to expand its geographical presence in resource-rich Africa -- at least once crucial Middle Eastern shipping lanes again appear relatively safe. Chevron isn't alone in its withdrawal from Middle Eastern projects -- rival ExxonMobil (NYSE: XOM  ) recently reduced its stake in an Iraqi field due conflicts between the Baghdad and Kurdish governments.

On the other hand, ExxonMobil recently acquired Celtic Exploration for $2.6 billion, and has bought up 226,000 acres of unconventional oil assets from ConocoPhillips in Athabasca, Canada for a price of $720 million. Going forward, Chevron has also been aggressively leveraging its non-conventional oil reserves, as it made an agreement with Argentine-government-controlled YPF to gain access to shale oil reserves located in Vaca Muerta in Argentina. The race is on to control promising fields in relatively safe locations.

Fool analyst Joel South notes that United States' oil and nat-gas production levels are moving up, but the industry is saddled with high capital expenditures, which crimp even the largest companies' ability to make any big domestic moves. The domestic oil-directed rig count also saw a significant decline due slowing drilling activities in the latest quarter. However, Chevron's efforts to go midstream with its Angola pipeline project should pay off in the near future. The company's Gorgon facility is also 67% complete.

Putting the pieces together
Today, Chevron has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 06, 2013, at 11:04 AM, buyandsqueeze wrote:

    given space and time not available here, each of the author's statements can be rebutted, if not actually refuted...and incorrect statements about the supposed "cancellation of Syria-related projects" (what ??) and reference to a non-existent "Angola pipeline project" help me disregard the author's main premise, since he's clearly not an expert on Chevron

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