Friday, 31 July 2015

US big cap oil - thoughts on Chevron

After briefly reviewing the prospects for Exxon Mobil (link here) after their (badly received) numbers earlier today, let's have a look at Chevron who also reported today.

As noted in the Exxon Mobil write-up making some semblance of a value call in the energy space is fairly easy BUT as always with 'weighing machine' calls the 'voting machine' psychology makes investors fearful.  I liked however how Chevron made the case for energy positions from a medium-term perspective based on that most beguiling of metrics: supply and demand.

Tactically Chevron also make the point that 'spare capacity low by historical standards'.  This may well be the case...but with demand conditions mixed and the aforementioned psychology negative it is unsurprising that investors pay this little regard.  

What matters more - as I argued at the link above - is the sustainability of dividend yields.  Investors need something to 'grab hold of' and Chevron's current 4.6% dividend yield is that sort of metric. Dividend growth/progression has been a positive trait for Chevron over the last few years and the below chart shows this against the larger cap oil peer group.   

What I found particularly interesting was the company's upfront assertion that by 2017 they would be covering their dividends via cash flow again via a variety of mechanisms including capex constraints (of course) but also price recovery and cash flow growth from projects (as key LNG/other projects shift from being capex consumptive to being cash flow generative) - 'at whatever (oil) price' (as per a conference call comment - very striking). They even hoped that progression in the dividend ('27 consecutive annual increases') would continue although I note at the last quarter they did not raise the dividend. (Of course with net debt less than x1 ebitda they have some natural flexibility too).   

Interestingly (and slightly differently from say the UK-listed BP and Royal Dutch Shell) this did not include proceeds from asset divestments which actually are proceeding at a solid clip

Despite some of the positive metrics above Chevron's shares are trading at around 2011 lows i.e. a little relatively worse than Exxon Mobil.  

Of course earnings were naturally poor with the expected combination of lower upstream earnings and higher downstream earnings occurring (but with the contraction of the former being much higher than the expansion of the latter): 

I observed at the Exxon Mobil link above that one relative factor that led me to a preference in the global large cap integrated oil space towards Royal Dutch Shell at prevailing.  Chevron - despite yielding 4.6% - is at a direct dividend yield discount to Royal Dutch Shell and also does not have the latter's specific synergistic possibilities from their proposed corporate union with BG Group.  However the extent of Shell's underperformance against Chevron (compared to say the equivalent data for Exxon Mobil) is less: 

So overall thoughts.  Even though there is clearly value - as discussed above - across the well capitalised integrated energy space - I feel more excited about Chevron than Exxon Mobil but in my internal pecking order even more excited about Royal Dutch Shell.  However for US holders wanting to hold an explicitly US corporate entity in the larger cap names for me Chevron is more compelling than Exxon Mobil.  

For me investors with anything other than a super short-term focus should be adding to their integrated oil sector holdings.  Chevron in absolute and relative terms has attractions.      

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