How High Can Chevron Go?

With Chevron hitting all-time highs, how much higher can the company's shares go?

Jun 25, 2014 at 12:50PM

Chevron's (NYSE:CVX) performance has been disappointing to say the least over the past few years. Since the beginning of 2013, Chevron has underperformed the S&P 500 by around 10%, excluding dividends.

But recently, the company has woken up, surging nearly 10% since the beginning of June. However, with Chevron flying to all-time highs, many investors will now be asking, how high can Chevron go?

By far the easiest, and simplest, way to put an estimate on how much higher Chevron's share price can go is to take a look at the company's valuation.

And it would seem, at least at first glance, that Chevron is actually overvalued at present levels. Indeed, Chevron's shares are currently trading at a P/E multiple of 12.9 compared to the company's five-year average of 10.3. Even on a forward basis, Chevron looks expensive trading at a P/E multiple of 11.1.

However, compared to the wider market and industry average, Chevron is undervalued. The S&P 500 currently trades at a historic P/E of 18.3, and the industry trades at a multiple of 14.1 times.

What's more, Chevron also looks overvalued on several other metrics. The company currently trades at a price to sales ratio of 1.1, compared to a 10-year average of 0.8 and a price to cash flow ratio of 6.8, compared to a 10-year average of 6.5. On a price to book basis, however, Chevron trades at a 10% discount to its 10-year average. 

Growth is key
While these high valuations are telling, they do not reveal Chevron's entire investment case. Part of the company's recent rally has to do with the wider market's rally and rising oil prices. There is also a third factor: future growth.

You see, Chevron is spending in excess of $40 billion per annum over the next few years to increase oil equivalent production by approximately 20%. This expenditure should result in earnings growth of 20% through 2017, assuming all other factors remain constant.

To some extent, this growth is de-risked. Many of the projects are already well underway or in the final stages of completion.

For example, the company's colossal Gorgon LNG project within Australia is expected to start up in mid-2015. Additionally, the Gulf of Mexico Jack and St Malo project, a key pillar of Chevron's growth plans, forecast to add around 5% per annum to company production, is on-budget and is on-track for start-up during the fourth quarter of this year. 

Further, Tubular Bells, another Gulf of Mexico project, is nearly 40% complete, and start-up is expected before year-end. The final Big Foot platform is expected to start up mid-2015.

So, key growth projects are already well underway.

Earnings will jump
As these projects come online, earnings will jump. Based on 2013 figures, Chevron reported EPS of $11.10, 20% growth gives us a 2017 EPS figure of $13.32 -- assuming no other factors.

Of course, this is forgetting the fact that Chevron is spending around $5 billion per annum on buybacks. Factor in the buybacks, and 2017 EPS could be within the region of $14.

Overall, then, based on 2017 figures, Chevron does look like it can push much higher. The company is currently trading at a 2017 forward P/E of roughly 9.4 -- cheap compared to historic multiples.

The better pick
Because of its size, Chevron deserves a premium over its peers. What's more, it could be said that because of the company's predicted growth, Chevron deserves a premium over larger peer ExxonMobil (NYSE:XOM).

Indeed, Chevron has been described as "bullish" when comparing it to ExxonMobil's spending plans for the next few years. Exxon only plans to spend $37 billion per annum through 2017 on capital projects, while Chevron intends to spend approximately $40 billion. 

Harder to grow
This discrepancy does have something to do with current production rates. Exxon's current production, in the region of 4.2 million boe/d, is extremely hard to sustain. Chevron's current production of 2.6 million boe/d is lower and easier to grow.

Chevron has also been more successful when it comes to exploration, discovering several high-quality Gulf of Mexico prospects, some of which are covered above.

Meanwhile, onshore U.S. Chevron's growth program is targeting the Permian where last year, production averaged 135,000 boe/d. The group is targeting production of 250,000 boe/d by 2020. However, within the U.S., Exxon has been caught off-guard, picking up substantial gas assets when it bought XTO Energy. Management has now changed tack and is sifting exploration to the Permian, Bakken, and Oklahoma. ExxonMobil plans U.S. onshore output of 225,000 boe/d by 2017.

Still, overall Chevron's plans for growth seem more attractive, and the company's current valuation factors this in.

Foolish summary
At present levels, it would appear that Chevron is overvalued on historic metrics but undervalued based on the company's future growth potential. 

Assuming all other things remain constant, Chevron's earnings will tick up around 20% through 2017, and this growth is worth paying for.

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.

Rupert Hargreaves owns shares of Chevron. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers