Will Chevron Beat the Dow Jones Industrials in 2014?

Chevron (NYSE: CVX  ) has had a reasonably good 2013, even though it hasn't been able to keep up with the even stronger performance of the Dow Jones Industrials (DJINDICES: ^DJI  ) over the course of the year. Although it performed much more strongly during the first half of the year than rivals ExxonMobil (NYSE: XOM  ) , BP (NYSE: BP  ) , and ConocoPhillips (NYSE: COP  ) , Chevron allowed its competitors' returns to catch up with it more recently. The raises the question of whether Chevron faces big challenges for 2014 that it could have difficulty meeting, or whether it's positioning itself for another breakout move higher in the new year.

Chevron has generally done a good job in facing its toughest challenge and keeping production levels growing to the greatest extent possible. With energy prices down over the past year, that goal-meeting hasn't translated into overall revenue growth for Chevron. But with the economy in the U.S. and worldwide starting to get back on track for faster growth rates, rising energy demand could support prices even in a time of plentiful supply and give Chevron shareholders the increased profits they want to see. Let's take a closer look at Chevron's prospects for 2014.


Falling gas prices are just one of the challenges Chevron could face in 2014.

Stats on Chevron

   

Average stock target price

$132.33

Full-year 2013 EPS estimate

$11.44

Full-year 2014 EPS estimate

$11.86

Full-year 2013 sales growth estimate

(2%)

Full-year 2014 sales growth estimate

2.1%

Forward P/E

10.4

Source: Yahoo Finance.

What's in store for Chevron's 2014?
Analysts remain somewhat optimistic about Chevron's prospects for 2014. The target stock price would represent an almost 8% rise from current levels. Combined with a solid dividend yield above 3%, reaching those levels would give investors a strong double-digit percentage return for 2014.

Producers throughout the industry have had to deal with weak prices during 2013, and early calls are for those price declines to continue next year as well. Several influential analysts expect another $10 per barrel drop in oil prices during 2014. Even though some of those estimates were made before the most recent data on industrial production and GDP growth came out, it's unclear whether rising energy demand can completely offset the supply overhang that exists in many key markets.

Chevron's international expansion will inevitably play a key role in its success, but working abroad has its own complications. Earlier this month, Chevron said it would delay a Chinese gas project over a disagreement with partner PetroChina on the best method for developing the project. Around the world, oil producers are turning to Chevron, Exxon, and other experts in unconventional drilling methods, seeking their expertise both to develop existing prospects and to gain the experience to take on future projects without further assistance. That dynamic puts Chevron and its peers in a tough position of having to defend their intellectual property while still working productively with partners. Meanwhile, controversy over hydraulic fracturing has caused tension in many areas, with protests in the eastern European nation of Romania leading to equipment damage and temporary operational halts there.

Chevron also has some company-specific challenges of its own. Looming over its head is a potential $9.5 billion judgment related to environmental damage in Ecuador, the liability for which Chevron assumed in its takeover of Texaco more than a decade ago. The recent decision by a Canadian court that could expose Chevron's oil-sands assets to that judgment is just the latest wrinkle in what could be a complicated legal battle throughout 2014 and beyond. At the same time, cost overruns on its Gorgon liquefied natural gas project in Australia have raised concerns about the economic viability of using LNG production and transport to get natural gas from lucrative plays off the Australian coast to energy-hungry users in China, India, and key Southeast Asian markets.

Finally, in downstream operations, Chevron and Exxon have chosen not to follow ConocoPhillips and others that have spun off their refining and chemical operations in favor of remaining vertically integrated. Chevron actually just brought on Jon Huntsman Jr. as a board member, potentially signaling an even greater move toward the downstream side of its business given Huntsman's experience in the chemical-manufacturing industry. With spreads between domestic and global crude oil prices having widened again recently, Chevron's prospects in refining and chemical manufacturing have a lot of promise, and that's a big reason why the company has partnered with Phillips 66 on a large-scale ethane-cracking facility that represents a substantial part of Chevron's overall capital budget.

Chevron's 2014 performance will come in large part from factors beyond its control, including market prices for oil, natural gas, and refined products like gasoline and diesel fuel. Yet with ambitious plans to keep expanding production capacity while also making it easier to bring those products to markets where demand is high, Chevron hopes to buck any negative trend in energy prices and take full advantage of all the opportunities in the industry in 2014 and beyond.

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