It is rare for an extremely large energy company to generate more than a modicum of enthusiasm in me, especially now that the U.S. onshore exploration and production scene is so compelling. The more I read about Chevron (NYSE: CVX), however, the more intrigued I become. That dull ember of interest is now on the verge of developing into full-blown effusiveness, and for good reason.
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Last year Chevron posted a 17% increase in share price, besting ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-B), the only other integrated majors to record a positive return.
Year to date, the stock is down 8%, but it has been a rough couple of months in the market, and I'm not particularly concerned with that right now. The company's future is solid. It has 28 projects coming online over the course of the next three years. They vary widely from offshore oil production to a massive Australian liquefied natural gas facility. And variety is the spice of life -- or, to be less cliche and more to the point, variety is a brilliant hedge in a world where oil and gas prices can climb to absurd heights and suffer sharp declines in a matter of months.
Business is booming, but more importantly, management is making smart decisions with its capital, and that bodes well for investors.
Why Chevron?
Over the past five years, Chevron has absolutely blitzed the S&P 500's return. And no, past performance doesn't guarantee future success, but taking a closer look at improving trends at Chevron hints at a bright future.
The company has played second fiddle to ExxonMobil for quite some time. Exxon's market cap is nearly double Chevron's, and the company has set a high bar for comparison. But that is beginning to change.
For the last two and a half years, Chevron has earned a higher net income per barrel of oil than Exxon. Exxon's purchase of U.S. natural-gas giant XTO Energy in 2009 figures prominently in that story, as well as the track record for shareholder return. Over the past decade, Chevron's return is about 237%, including dividends, while Exxon's is 153%. The free fall of U.S. natural gas prices is taking its toll on America's biggest energy company.
Dividends
Shareholder return is why we're in this game to begin with, and much of Chevron's aforementioned thumping of the S&P can be attributed to dividend reinvestment. Compounded since 1980, dividends have made up 75.8% of the company's total return.
Chevron has paid out regular dividends for 100 years, so expect that trend to continue. In 2011, the company increased its dividend by 12.5%. This past April it ratcheted up the quarterly payout by another 11%. Its yield currently stands at 3.6%, good for an annual payment of $3.60 per share.
Risk
Chevron is currently battling an $18 billion lawsuit in Ecuador. U.S. courts have repeatedly rejected Chevron's claims of fraudulent witness testimony, and its prospects of winning the case are not looking good.
On one hand, the damage Ecuador alleges Chevron is liable for actually came at the hands of Texaco, which Chevron later acquired. This means that the company's operational reputation, and stock price, shouldn't be affected in the way BP's was after the Gulf of Mexico oil spill.
That being said, $18 billion is a lot of money to shave off your bottom line.
Mitigating risk
Environmental incidents are a serious, everyday threat for oil companies. But in Chevron's case, expect them to be fewer and farther between in the coming years. The company is ahead of the game, implementing technology not only to prevent disaster, but also to maximize cost savings by catching problems before they become big and expensive.
Using a sophisticated network of sensors, fiber-optic communications, and impressive data-crunching software, Chevron is able to monitor global operations from one of four mission-control-like centers. Employees in Houston can track subtle changes in machinery in Africa and alert teams on the ground to make repairs before things go terribly wrong. Note: This isn't a hypothetical situation; this has already happened and saved the company millions of dollars in damages and lost production.
Of course, it is impossible to eliminate all risk, but Chevron has clearly made an important investment in technology that is already paying dividends.
Foolish takeaway
Energy stocks have gotten crushed over the past two months, creating a buying opportunity for investors who are thinking of the long term. Chevron's commitment to generating consistent returns for shareholders is hard to resist right now.
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