What Will It Take to Power Chevron Higher in 2013?

Now that 2012's nearly in the rearview mirror, investors are beginning to sift through the market for the best stocks of the upcoming year. The future is plagued with uncertainty, but that has always been the case, and it's never stopped us from seeking out long-term values. One way to find those values is to look for companies with a long history of success. The Dow Jones Industrial Average (^DJI 0.16%) contains many such companies, but some are better investments than others.

Today we'll be taking a look at Chevron (CVX 1.27%), a Dow component since 2008 (although it had previously been on the index beginning 1930 as Standard Oil of California, up to 1997), to see whether its preparations for 2013 -- and analyst attitudes -- indicate a stock with growth potential, or one to avoid.

Past-year recap
Chevron's stock has not done well in 2012. When you take a look at its fundamentals, it's easy to see why:

CVX Revenue TTM data by YCharts.

Revenue is down. Net income is worse. Free cash flow is plummeting, and return on equity has tanked. Not one of Chevron's major metrics has improved this year, in contrast to fellow supermajor ExxonMobil (XOM 1.08%), which plowed through a difficult year with improvements on all but its free cash flow. Does that mean Chevron will sink in 2013? Let's see what the Street thinks:

Sources: Yahoo! Finance and Morningstar.

What the numbers don't tell you
Despite what appears to be long-term weakness, analysts are surprisingly bullish. It doesn't hurt to be so inexpensive on a P/E basis, although Chevron's price to its free cash flow is much weaker than Exxon's. Don't try to excuse this as the result of exploding capital expenditures, either. ExxonMobil's capex has grown more than Chevron's in the past five years, and in the past four quarters they're virtually neck and neck for increases in capex spending.

However, whatever happens in 2013, there's one thing that virtually no one can confidently predict: energy prices. If oil drops, so will Chevron -- and so will the rest of the oil industry. You're probably sick of hearing this by now, but the threat of economic uncertainty can and will depress oil prices if the economy starts to decline. Even a certainly expanding economy in America can't hold up oil prices if China and Europe tighten their belts. Chevron CEO John Watson has said that affordable energy is a competitive advantage, but better margins on each barrel of oil won't help if global demand plummets. The possibility of another 2008-style oil price crash is remote, but not impossible.

Chevron has a lot of new options for exploration in 2013 that could help turn around an anticipated decline. One big project is a tie-up with Apache (APA 2.41%) in Canada to develop 644,000 acres of British Columbian natural gas resources. This project comes with plans for a LNG processing plant and a major pipeline, which Chevron's bought into from Encana (ECA 1.50%) and EOG Resources (EOG 0.60%). Chevron's also acquired significant Permian Basin assets from Chesapeake Energy (CHK +0.00%). The Permian has historically been one of America's most productive regions, ever since Spindletop struck a gusher in Texas more than a century ago. There's been plenty of work done to get easy oil out, but there also appears to be plenty of difficult oil left to extract.

However, even if oil prices do hold up and these new opportunities pan out, the possibility of tax reform (hold your chuckles, please) could shred any number of lucrative loopholes Chevron and other supermajors use to offset the high costs of energy exploration. I don't see real tax reform happening with the incoming Congress, but maybe President Obama will become a master hypnotist next year. Stranger things have happened.