Chevron Is Cheap, But Where Is the Growth?

The first quarter earnings report from Chevron Corporation (NYSE: CVX  ) again highlights the lack of production growth from the majors. The oil major continues to obtain the majority of its profits from projects around the globe while domestic energy production soars.

The results are similar to those produced by ExxonMobil Corporation (NYSE: XOM  ) , which sits virtually in the middle of the energy explosion in Texas but has widely missed out. Both companies' shares remain cheap at around 11 times forward earnings; this is especially cheap in a market that a lot of analysts consider expensive.

The interesting part is that smaller producers like Continental Resources (NYSE: CLR  ) have turned a focus on one domestic shale basin into a powerhouse to match the domestic production of these energy majors.

Declining domestic production
For the first quarter, Chevron generated roughly 25% of its profits from the domestic upstream operations. The company saw growth from the Marcellus shale and Delaware Basin regions, but overall domestic production declined to 640,000 boe/d. The numbers were down 24,000 boe/d, or 4%, from a year earlier. Liquids production declined 4% in the first quarter, while natural gas production decreased 3%.

ExxonMobil didn't fare much better, with domestic natural gas production declining by 5.2% while oil production increased slightly. The company generated higher domestic profits due to higher realizations of natural gas and a larger focus on that energy source than Chevron.

When the domestic results of the oil majors are viewed within the prism of companies like Continental, the lack of growth is utterly shocking. As a prime example, Continental Resources continues to generate annual production growth in the 30% range and expects to reach domestic production of nearly 300,000 boe/d by 2017.

Long-term growth
For investors that can hold on for the long term, Chevron has numerous projects forecasted to drive production growth 20% by 2017. With the company producing 2.59 million boe/d in the first quarter, the production growth amounts to over 500,000 boe/d. Chevron has numerous long-term development projects that should start up in that time period, including the massive Gorgon and Wheatstone LNG projects in Australia. In fact, the company continues to list the majority of the project development outside the U.S. At the same time, Chevron listed several major chemical projects in the Gulf Coast reaching major milestones that are expected to utilize the suddenly abundant natural gas in the U.S. -- ironically, the gas produced by independent energy producers.

Bottom line
Chevron's stock remains cheap, trading at only 11 times earnings while providing investors with a 3.4% dividend. The company shouldn't be confused with a growth stock considering that its forecasted production growth by 2017 amounts to less than 5% annualized growth. Regardless, the company is cheaper than competitor ExxonMobil which trades at 13 times forward earnings and only offers a 2.7% dividend.

For investors wanting higher growth, Continental Resources trades at a reasonable 16 times forward earnings with an expected growth in excess of that multiple. In general, the sector is cheap and investors must chose which stock meets their risk tolerance.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven’t heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America’s greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, “The IRS Is Daring You to Make This Investment Now!,” and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

DocumentId: 2991201, ~/Articles/ArticleHandler.aspx, 7/24/2014 7:35:15 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement