Five weeks ago, I outlined my plans to create a portfolio of 10 companies that all have one thing in common: They provide a basic need or deliver life's necessities. It's my contention that basic-needs companies can offer investors stability and growth throughout any market environment thanks to consistent demand, incredible pricing power, and delectable dividends. This portfolio, which I have dubbed the Basic Needs Portfolio, will be pitted against the S&P 500 over a period of three years with the expectation of outperformance for all 10 stocks. I'll be rolling out a new selection to this portfolio every week for the next five weeks.
You can review my previous four selections here:
Today, I plan to introduce the fifth of 10 selections to the Basic Needs Portfolio: Chevron (NYSE:CVX).
How it fits with our theme
There are no magic surprises here: We need energy to provide electricity to our homes and businesses and power our cars and trucks. Chevron is a diversified oil and gas company that does everything from drilling for oil, natural gas, and natural gas liquids, to refining petroleum into everyday products such as fuel for our cars.
What we often forget is that on top of being a domestic and international juggernaut that supplies the world with much of its energy needs, petroleum has numerous other uses outside of energy. According to Ranken Energy, a 42-gallon barrel of oil makes 19.4 gallons of gasoline. The remaining petroleum is used to make some 6,000 different items, including household products like plastic containers, dishes, and candles, women's cosmetics, and even the tires on your car, just to name a few. Petroleum is an essential of life, so it only makes sense to include one of the biggest companies involved in drilling for, retrieving, and refining petroleum products in this portfolio of basic needs stocks.
The three biggest risks that integrated oil and gas companies face are political unrest in overseas markets, imprudent capital expenditures, and a global growth slowdown.
Despite operating around the globe, many of Chevron's assets are well-protected from political unrest or violence. The same can't be said for Italian-based Eni (NYSE:E) which saw a good chunk of its oil production come under serious pressure in 2011 because of civil unrest and an eventual regime change in Libya. At the time, 14% of Eni's daily production – nearly 250,000 barrels – came from Libya and it maintained quite a few other undeveloped assets in the country. Eni's prospects have since improved, but other oil and gas companies deal with the similar potential for unrest on a daily basis.
No oil and gas driller is perfect, not even Chevron, and all have made an imprudent asset investment before. Luckily for Chevron, the company's diversified global assets provide ample cash flow – an average of $11.4 billion over the past three years – which makes it easy for the company to utilize this cash for drilling activities or improving its refining capacity.
On the other hand, Chesapeake Energy (NYSE:CHK) got itself in a lot of trouble when natural gas prices sank to a decade-low last year. Chesapeake leveraged itself to the hilt by purchasing natural-gas-heavy assets last decade but was forced to reduce its output when nat-gas prices hit their lows. Chesapeake would have actually run into a capital expenditure shortfall in 2013 if it didn't sell off some of its assets to boost its available cash.
Finally, there's the threat of a global slowdown which would negatively impact the need for oil, natural gas, and natural gas liquids, and send prices and volume markedly lower. This is a threat that diversity of assets certainly helps abate, but that Chevron is unable to completely escape from.
Despite the risks mentioned above, I feel Chevron is the strongest and most attractively priced integrated oil and gas company.
Chevron's biggest opportunity is in its overseas markets. It's not a big secret that China, India, and much of Southeast Asia represents an area of independent growth that could push higher without the help of U.S. or Western European demand. This is of particular interest to Chevron which is Australia's largest natural gas asset holder, with 21 known finds off the coast of Australia since mid-2009 which have added roughly 10 trillion cubic feet in reserves. With its proximity to these rapidly growing markets, and natural gas prices commanding a premium overseas that they do not domestically, Chevron looks poised to profit from high growth in this region.
But, we can't forget that Chevron is a domestic juggernaut as well. As Chesapeake Energy was putting the "for sale" signs in its front yard, Chevron and Royal Dutch Shell (NYSE:RDS-A) were chomping at the bit to gobble up those assets. Chevron and Royal Dutch Shell wound up purchasing Chesapeake's Permian Basin assets for a sum of $3.3 billion in September. This is important because the Permian Basin is known for its liquids-rich assets – translating to higher margins since oil prices are often less volatile than natural gas prices – and it's close enough to Louisiana's terminals that bypassing Cushing, Okla., and shipping by rail to obtain the higher Brent crude price makes sense.
It would also be completely foolish of me not to mention Chevron's onshore natural gas assets which could turn into a big moneymaker if President Obama follows through with policies designed to make America more energy independent.
Perhaps the greatest aspect of Chevron, and the reason why I prefer it over peer ExxonMobil (NYSE:XOM), is the company's emphasis on its shareholders. Chevron repurchased $1.25 billion worth of its shares in just the past quarter and has a 25-year streak of boosting its dividend.
In its most recent quarter it announced an 11% dividend increase, which would pushe its yield up to 3.4%, significantly higher than ExxonMobil's 2.8%. Simply put, there is no smarter play on energy assets than Chevron.
Stay tuned next week, when I'll unveil the sixth selection to the Basic Needs Portfolio.