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Chevron (CVX) is my easy pick for August investment. Amazingly cheaper than other oil companies like Exxon (XOM) or Total (TOT) August 30, 2006

Posted by deminvest in Chevron (CVX), Exxon (XOM), investment, stock I own, stocks, Total (TOT).
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We proletarian investors do not have chances to get first hand information about stocks, but we can read numbers. When I see lovely bargain numbers in a healthy company that I understand well like Chevron I buy.

CVS has P/E: 9.06, forward P/E: 8.37.

Now compare it to XOM: P/E:10.86 forward P/E:10.90. CVX is much cheaper and also expected to grow. CVS has also better P/E ratios than TOT.

Now that oil is so precious, what really brings value to oil companies is the amount of oil reserves. Oil equivalent reserves are the total amount of oil and natural gas those companies own and can take out of the soil. The numbers there are amazingly favourable for Chevron:

CVX has oil-equivalent reserves of 9 billion barrels. CVX has Market Cap (price to buy all the stocks) of 144.50B.

Exxon (XOM) has a Market Cap of 412.64B for 21 billion barrels of oil-equivalent reserves.

Total (TOT) has a Market Cap of 334.30B for 11 billion barrels of oil-equivalent reserves.

So when I buy CVX, I get the most inexpensive oil.

Considering that CVX I growing fast (at least as long as oil price stays high):

Qtrly Revenue Growth (yoy):10.30%, Qtrly Earnings Growth (yoy):18.20%.

If I add to the lovely picture the fact that CVX will give me a hefty 3% dividend yield, I have the great pick of August and will buy $1000 worth of CVX in the next… 200 seconds.

Let the force be with me!

Comments»

1. len - August 31, 2006

let the force be with u. great pick and good luck!

2. Ben Evans - August 31, 2006

I think you will do very well with CVX. You might also want to consider COP it is trading @ a PE of 5.88. I wish you success.

Good luck

3. deminvest - August 31, 2006

Thanks len.

Ben, you’re totally right COP is even cheaper and has an even lower priced oil reserves.

That is why Warren Buffet, who is always looking for real value, has chosen COP.

I chose CVX over COP mainly because of CVS’s dividend yield of 3.20%. I love high dividend yiels. COP only has 2.20%

Still probably COP will be my September buy… And I am lucky because September is tomorrow!

4. CrossProfit - September 4, 2006

Ben Evans and deminvest-

Our primary analysis for ConocoPhillips (COP), Chevron (CVX) and ExxonMobil (XOM) is that high oil prices should continue generating above normal earnings for the next several years.

The Facts on ConocoPhillips (COP):

COP is banking on an 18% – 20% stake in Russian Lukoil to shore up its dwindling North American well production. A full 10% of production is expected to come from Lukoil.

The divesture of wells in Canada is negligible (less than 30,000 bpd) and is part of the Burlington Resources acquisition agreement. The BR acquisition was an expensive North American natural gas play. The re-entry into Libya should provide handsome profits on 40,000 bpd at a production cost of $5 per barrel! This should more than make up for the Canadian loss. COP is counting on natural gas prices remaining above $6.55 per Mcf, otherwise the BR acquisition becomes mathematically problematic. COP is the largest natural gas producer in North America.

Venezuela is no longer considered a viable reliable option for replacing existing production sites. There is plenty of heavy crude down there but no one is willing to risk spending billions to develop these new fields.

The new refinery project in Yanbu, Saudi Arabia, in conjunction with Aramco and Halliburton, should contribute to the refining division earnings as of H2 2011. This single new ’Saudi sour’ refinery project will have the capacity to supply 2% of U.S. consumption.

Historically refining operations have had far lower margins than crude production. In 2005 production accounted for only 27% of sales yet was 62% of earnings. Lately this has not been the case and has benefited COP. COP has a 36% stake in the Alaskan Prudhoe Bay fiasco. Prudhoe Bay represents approximately 15% of COP’s global oil production (136,000 bpd out of 916,000 bpd).

COP’s historical financial performance (balance sheet, income statement/earnings per share etc.) depicts a classic rollercoaster ride. Over the past decade the energy sector has been highly volatile and COP consistently exemplifies this to an extreme, more so than some of its competitors.

Comparison to peers as of 08/25/2006:

ConocoPhillips (COP) verses Chevron (CVX) verses ExxonMobil (XOM).
COP’s market cap = 109 billion, trading at a trailing PE of 6.1, dividend yield = 2.2%
CVX’s market cap = 147 billion, trading at a trailing PE of 9.2, dividend yield = 3.2%.
XOM’s market cap = 419 billion, trading at a trailing PE of 11, dividend yield = 1.8%.

The question that an investor should ask is whether COP is the best out of the three companies. On the surface COP looks very attractive. The stock is trading at a low multiple (6.1) and is paying a nice dividend. However further analysis reveals a slightly different and somewhat complicated picture.

Fundamentals: (from our proprietary research/analysis)

Reserves Replacement:
COP = 109% (enables future production growth)
CVX = 58% (not good at all, hampers future growth)
XOM = 105% (enables future production growth)

Reliance on U.S. Economy:
COP = 73%
CVX = 45%
XOM = 31%
(Should a slowdown occur in U.S. consumption COP more likely to take a hit than XOM or CVX.)

2006 & 2007 Earnings Growth:
COP, 2006 = 25% & 2007 = 13%
(Recent Q2 results are momentarily better due to BR acquisition accounting manipulations. We see oil remaining high but natural gas at 6.60 -7.70 for Q4)
CVX, 2006 = 19% & 2007 = 1%
XOM, 2006 = 18% & 2007 = 6%

Russian Roulette:

All those familiar with the Yukos travesty know that Vladimir Putin can not be trusted to abide by international standards of commerce. The entire dismantling of Yukos was due to mafia style politics; essentially someone got on Putin’s wrong side. This is factually confirmed from the current events. Yukos could have done exactly what the Russian government is doing now; sell off assets and pay off the (alleged) tax bill and still be a viable business. This is the true litmus test proving that what Putin has done is nationalize private assets under the guise of capitalism only to find some new suckers that pray that the (elected) dictator won’t do the same again. If the prayers become the prey it serves them right. Not to mention that the Russian government (Putin’s circle of ten) is pocketing all of the proceeds and leaving Yukos shareholders out to dry. We call this dormant disease Putinitis. The question is when will the next outbreak occur? The market currently assesses a high risk premium on Lukoil.

At CrossProfit we emphasize fundamental analysis and delve into technical analysis only upon completion of rigorous fundamental analysis. The CrossProfit evaluation line is based on fundamentals.

CrossProfit Evaluation Line: (buy below the line and sell above the line)
COP EOL 06/07 = 69.80
XOM EOL 03/07 = 75.80
CVX EOL 10/06 = 65.30

For those that are unfamiliar with the term, EOL = end of line. The evaluation line is a twelve month forward looking line that specifies a risk/reward evaluation factoring in market volatility and determines whether or not an investment opportunity exists. Towards the ‘end of the line’ the line is usually less accurate as the evaluation was based on data available a while ago. In plain English, the CVX evaluation line is the least reliable because it ends in 10/06.

Based on the above;
COP has a 6-7% upside
CVX is currently slightly overvalued
XOM has a 8-9% upside

All data excludes dividends. We expect XOM to raise its dividend or issue a special dividend in Q2 2007.

So what does all this mean?

1) Higher margins benefiting COP refineries.
2) Canadian/Libyan production cancels out each other.
3) Paid a very high price for BR acquisition resulting in lower PE multiple.
4) Increased natural gas capacity from acquisition stays profitable and contributes to earnings growth as long as the bottom doesn’t fall out on pricing.
3) Positive reserves replacement.
4) Putinitis.
5) Pipeline investment in Venezuela but no new production or refinery projects.
6) Yanbu not relevant for now.
7) Prudhoe Bay is statistically not relevant (see below).

Prudhoe Bay:
Only one COP refinery relies on Alaskan oil for its supply and that refinery can be supplied from other sources. COP will take a hit on production profits from the Alaskan fiasco. However, with refinery margins up and refining and marketing contributing over 65% of revenue, COP still comes out ahead on a YOY (year over year) basis. Had the Alaskan problem occurred a few years ago it would be a different story.

Conclusion:

COP is a gamble on geopolitics including internal Russian politics. COP could turn out to be the best of the three by far. Assuming that a 73% reliance on the U.S. for revenue is a positive factor and the gamble on spreading supply sources amongst several high risk areas pay off, there is a theoretical 28% upside. CrossProfit concludes that 7% by next year is more likely. Should the geopolitical risks diminish, a higher PE ratio is in order. There are other contributing reasons for a COP lower multiple such as the balance sheet ‘goodwill’ factor (a negative); XOM 0%, COP 18% and CVX 3.6% of assets. Any reduction would cause a substantial drop in earnings (paper p&l).

As of today there is little downside risk. Should Putin decide to play his hand tomorrow the market has already factored in most of the damage from Putinitis. Either way COP is a stock to buy and hold for long term gains and dividends.

Summary:

The investment outlook for the oil and gas industry is positive. CrossProfit analysts conclude that oil prices are expected to remain relatively high in 2006 and 2007. Order of preference is as follows; XOM, COP, CVX.

Disclosure: This article was written by a CrossProfit analyst and does reflect the opinion of CrossProfit.com.
http://www.crossprofit.com

5. deminvest - September 5, 2006

Well it appears that our Chevron has hit a huge underwater oil reserve. What luck!

6. J Lind - February 1, 2007

Great analysis CrossProfit; thanks for sharing it.

7. deminvest - February 1, 2007

Yes, thank you also from me CrossProfit. It is really convincing. I did already have some XOM. A short time after reading it, I did actually buy COP, but I forgot to write it as comment on this post

https://deminvest.wordpress.com/tag/cop-conocophillips/

8. Sold Chevron, Intel and Nvidia yesterday, to cash in gains in such uncertain times. « Democratic Investments by the people for the people - September 5, 2007

[…] 15 CVX Chevron for  $68.22 each one year ago. Selling 12 now at 88.44 gives me all my invested money back and leaves me with 3 free CVX shares worth $270. A 27% gain in a year + a 3% dividend seems good for me. Why did I buy CVX last year? […]

9. I sold 8 Petrochina shares yesterday: they’re 40% up since I bought them in May « Democratic Investments by the people for the people - September 25, 2007

[…] barrel of oil equivalent in Petrochina’s reserve has a price tag of $15. Very low compared to some oil companies that are priced up to $30 per boe (barrel of oil […]


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