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Chevron / Texaco
Oh thanks Cramer :-(

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By bruno9
August 4, 2006

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Well folks, our worst (at least my) nightmare; Cramer discusses Chevron. He argued last night that one should buy Chevron because its stock did not go down when it didn't meet analyst expectations. Yuch, ugh, and yikes! For a guy who screams to claim to be "vigorous" in his thinking and analysis, he ought to be taken to the woodshed.

Case for Chevron:

The company did increase earnings by 18% for the latest quarter. From the latest 10Q: Net income for the first six months of 2006 were 8,349 millions as oppose to 6,361 millions (hereinafter all numbers will refer to millions) in 2005 period. Moreover, the only income segment where the company earned less in '06 than in '05 was in the Downstream International Segment: 814 vs. 929. Now, what I think is really significant about Chevron is its Total Debt: 6,022 in 2006 as oppose to 8,353 in 2005. This company earned in the first half of 2006 more than 2 billion dollars than what it has in total debt (8,349 minus 6,022). For such a capital-intensive industry, and not withstanding Chevron's purchase of Unocal, Chevron is not highly leveraged. Interestingly, Chevron's Interest Income rose to 173 in '06 from 114 in '05. Company is making money with little comparative debt.

So why all the angst about Chevron?

ConocoPhillips. The week before Chevron posted its 2nd quarter earnings, Conoco posted an increase of 68% and blew out analyst expectations. Oh boy! Chevron should do the same, no? Aren't they both major integrated oils? No, not exactly. These companies are fundamentally very different. I own both, and I'll continue to own both for different reasons.

The case for owning ConocoPhillips (the hare) and Chevron (the tortoise):

From Conoco's latest 8-K, you'll see that Total Debt in 2nd quarter '06 is 29,510; a Debt-to-Capital Ratio of 27%. Conoco is a much more leveraged company. Moreover, when you look at Conoco's upstream oil extraction and exploration, you see a mix bag of hits and misses, not that much different than Chevron. What makes Conoco's earning stand out are two other features that separate it from Chevron: first and foremost, earnings from natural gas exploded in '06 (we can thank Burlington Resources for that.); second, like Valero, Conoco's refineries appear to be taking advantage of the crack spread in refining sour crude. It appears that Chevron's 19 refineries are not in position to take advantage of the widening crack spread? Nevertheless, Chevron will appear to be able to rectify the situation down the road. I contend and believe it is easier to upgrade an existing refinery than to build one from scratch because of the NIMBY effect.

Because of Burlington Resources, Conoco is more of a natural gas company in my estimation. Until recently, natural gas prices had been pretty much flat because of the past mild winter. Nevertheless, as posters in Fooldom have mentioned, there had been a disparity between the price of crude and the price of NG. If the disparity changes, and if natural gas proceeds to move higher, this hare (Conoco) is off to the races. The 68% increase in earnings will only be the beginning of truly explosive growth.

Meanwhile, Chevron (the tortoise) will chug along making its money and paying a higher dividend than Conoco for now (.52/share vs. .36/share). In addition, what happens if oil falls to $40/barrel? I believe the race goes to the tortoise (Chevron) in that scenario. Chevron will stay make money, but its long-term debt will be much more manageable than the highflying hare's debt.

In the race between the tortoise and the hare, I'm placing my bets on both. I believe that both will be in the money. If one happens to make much more than the other, so be it; I'll be laughing to the bank in either case.

Finally, what would make me change my opinion of Chevron?

Chevron tries to become something it is not; my tortoise wants to become a hare. If Chevron takes on debt and foolishly begins to overpay for either new acquisitions or overpays for capital improvements, then I'll have to find another tortoise.

Regards,
bruno9


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