Chevron Corporation: Oil Major on the Cheap

While investors fret over expensive biotech and social media stocks, oil majors like Chevron offer compelling valuations and solid dividend yields.

Apr 23, 2014 at 9:49AM

In a market constantly claimed to be overvalued, the major oil exploration and production firms provide attractive valuations. Not only are global energy prices at highs, with Brent crude hovering near $110, but several catalysts also exist to keep prices high going forward.

Chevron (NYSE:CVX) is a prime example of a strong E&P firm with a solid dividend and numerous large-scale projects ready to usher in growth. In general, the sector is ripe with decent values and solid dividends. At a valuation of only $86 billion, ConocoPhillips (NYSE:COP) offers a higher ability to grow and a higher dividend at 3.9%, while BP plc (NYSE:BP) offers a cheaper valuation at only 10 times forward earnings estimates. Chevron, though, sits in the middle with good growth prospects, especially in delivering liquefied natural gas, or LNG, to Asian-Pacific markets.

The recent volatile market has these energy names grabbing more attention with attractive relative valuations. The stocks have seen some gains, but it doesn't appear too late for new investors to take advantage yet.

First-quarter update
The company provided a mixed interim update for the first quarter where one-time charges will push earnings below those of the fourth quarter. In addition, weather affected operations in North America while higher demand in Thailand and production at an LNG facility in Angola helped offset the weather reductions.

Most notably, Chevron is now realizing $4.70 per Mcf in its U.S. operations, up from only $3.11 in the same period last year. In comparison, international natural gas production achieved an average price of $5.97 per Mcf, which is about in line with the average in 2013.

Because of these numbers, analysts have cut earnings estimates to around $2.58 for the first quarter. Though slightly disappointing, the numbers still add up to huge profits.

Australian LNG exports
Chevron has spent numerous years working on massive LNG projects on the coast of Australia that are finally approaching production starting next year. The Gorgon and Wheatstone projects are now progressing toward completion with the Gorgon over 70% finished. The projects aim to supply natural gas to Asian-Pacific markets.

The Gorgon project involves a three-train 15.6 million ton per annum, or MTPA, LNG facility, a domestic natural gas plant with the capacity to supply 300 terajoules of gas per day and a carbon dioxide injection project on Barrow Island. The project is expected to start-up the first train during 2015. The LNG is 65% committed under long-term contracts.

The Wheatstone project had a projected cost of $29 billion and includes a two-train 8.9 MTPA LNG facility and a separate 200 terajoule per day domestic gas plant on the West Pilbara coast in Australia. The original design includes the capability to expand to 25 MTPA of LNG. The project is roughly 30% complete, and Chevron owns a 64% interest in the facility. The LNG is now 85% committed under long-term contracts.

Attractive valuations
The group of large E&P companies offers very attractive valuations in a volatile market along with very attractive dividend yields. The below chart compares the attractive price-to-earnings ratios of the group:

CVX PE Ratio (Forward) Chart

CVX P/E Ratio (Forward) data by YCharts.

Bottom line
Naturally, investors can invest in BP or ConocoPhillips for the higher dividend yields, but Chevron appears to offer the right mix of growth and yield. The massive-scale LNG projects should set Chevron up for years to benefit from the growing demand for natural gas in Asia. All the while, the stock is very attractive, trading at only 11 times earnings estimates.

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Mark Holder owns shares of ConocoPhillips. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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