Recommendation:
Buy Chevron and Occidental Petroleum (CVX & OXY)
Integrated: Chevron
• 2nd largest US traded oil company by market cap.
• $198B in 2010 revenue, $19B net income
• 2.763B in net oil equivalent production
• 58,000 employees and 4,000 service station employees
Chevron: Strong Financials
FCF
Mgn
3Yr
Avg
Total
Debt/Total
Equity
Sum
(Lower is
better)
Ticker
Mkt.
Cap.
Div.
Yield
5Yr. Div.
Growth
FCF
Yield
WACC
ROIC
P/B
P/E
3Yr
Avg
ROE
XOM
360B
4th
4th
4th
1st
7th
6th
1st
1st
2nd
30
CVX
190B
2nd
3rd
3rd
2nd
6th
2nd
2nd
2nd
1st
23
COP
88B
1st
1st
2nd
5th
4th
4th
6th
3rd
8th
34
HES
18B
6th
7th
6th
7th
1st
3rd
5th
6th
6th
47
Chevron: Strong Financials
Measure
CVX
Top 4 Mkt. Cap. Avg.
Dividend Yield
3.38%
2.73%
5Yr Net Div. Growth
9.11%
7.41%
FCF Yield
7.11%
4.48%
14.64%
10.34%
P/B
1.62
1.53
P/E
8.24
8.87
P/E 5yr Avg. minus
Current P/E
1.09
2.20
19.53%
13.73%
3.27
2.74
9.89%
20.56%
WACC ROIC
3Yr Avg. ROE
FCF Mgn. 3Yr Avg.
Total Debt/Total Equity
CVX: Dividend History
CVX Dividend (CAGR: 8.19%)
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
CVX: Replacement Ratio
CVX SWOT Analysis
Strengths
 Very large, well established
 Moderate Beta of 0.98
 Strong financials; good track
record in most aspects
Weaknesses
 2010 Replacement ratio < 1,
but 10 year avg. = 1.01
 Price correlated to Brent while
Brent-WTI spread at highs
Opportunities
 Reserve growth through
acreage acquisitions
 Oil consumption increases
abroad
Threats
 Tax increases
 Environmental concerns
 Global economic weakness
CVX Investment Information
Prev Close:
94.66
1y Target Est:
108
52wk Range: 80.41 - 109.94
Avg Vol (3m): 10,954,200
Market Cap:
189.6B
P/E (ttm):
8.33
EPS (ttm):
11.45
Div & Yield: 3.12 (3.38%)
Forward P/E:
7.24
E & P: Occidental Petroleum
• Largest US traded E&P by market cap: 61.57B, nearly 2x as
large as next largest Anadarko at 32.8B
• Highest dividend yield (2.45%) in top 6 US E&P, 2nd in top 16
• 3.36B barrels of oil equivalent (BOE) proven reserves as of
2010 end.
• 19B in 2010 net sales, 4.53B net income
• Has outperformed S&P last 12 years (though currently
trailing S&P YTD)
Occidental: Strong Financials
Measure
OXY
Top 4 Mkt. Cap. Avg.
Dividend Yield
2.45%
1.24%
5Yr Net Div. Growth
18.29
9.15
FCF Yield
2.52%
0.00%
WACC ROIC
12.63%
9%
P/B
1.75
1.39
P/E
10.49
14.14
P/E 5yr Avg. minus
Current P/E
4.98
7.45
15.11%
7.49%
23.47
8.54
12.08%
34.43%
3Yr Avg. ROE
FCF Mgn. 3Yr Avg.
Total Debt/Total Equity
Occidental: Reserve Growth
OXY Proved Reserves (CAGR: 4.35%)
3500
3400
3300
3200
3100
3000
2900
2800
2700
2600
2500
2006
2007
2008
2009
2010
Occidental: Dividend Growth
Occidental: Sales Growth
Occidental: Correlation to Oil (Timing)
SWOT Analysis
Strengths
 Largest US E&P
 Strong reserve, sales, and
dividend growth
 Strong financials compared to
peers
Weaknesses
 New CEO in 2011 (unproven
but promoted from COO)
Opportunities
 May be currently underpriced
 Continuing oil shale
acquisitions and international
plays
Threats
 Tax increases
 Environmental concerns
 Global economic weakness
OXY Investment Information
Prev Close:
75.72
1y Target Est:
113
52wk Range: 66.36 - 117.89
Avg Vol (3m): 5,976,330
Market Cap:
61.54B
P/E (ttm):
10.49
EPS (ttm):
7.08
Div & Yield: 1.84 (2.60%)
Forward P/E:
8.47
Investment Theses
• Chevron is a large cap integrated financially outperforming
its peers. A respectable dividend with a history of growth
protects against the downside while a moderate beta and
solid correlation to oil prices should cause it to also do well
in an up market.
• Occidental Petroleum is a large cap E&P with international
production diversification and is a financial standout among
its peers. A beta slightly over one paired with an acceptable
dividend give it an upside and downside protection. Now
appears to be a good time to buy considering the tight
correlation to oil and the discount to said correlation.
Portfolio Placement / Recommendation
$/SH. SH. # TOTAL $
WT.
BETA
WT. STD.
BETA DEV.
WT.
STD.
TTM DIV.
DIV. $ YIELD
WT.
YIELD
DESCRIPTION
AMLP
15.3
350
5355
0.1276
0.80
0.10
0.02
0.003
0.99
0.06
0.01
Pipeline ETF
CVX
94.61
100
9461
0.2254
0.77
0.17
0.06
0.013
3.00
0.03
0.01
Oil Integrated
FEN
26.16
200
5232
0.1247
0.92
0.11
0.05
0.006
1.85
0.07
0.01
Pipeline CEF
OXY
78.56
100
7856
0.1872
1.02
0.19
0.11
0.021
1.76
0.02
0.00
Oil E&P
PXJ
17.47
400
6988
0.1665
1.34
0.22
0.10
0.016
0.08
0.00
0.00
Oil Services Fund
VPU
70.74
100
7074
0.1686
0.61
0.10
0.03
0.005
2.69
0.04
0.01
US Utility Fund
YIELD
3.56%
TOTAL
WT.
AVG.
$41,966
$10.36
BETA 0.91
STD.
DEV.
0.064
Portfolio Placement / Recommendation




BUY 100 shares of CVX at Limit Price of $95.00 ($9,500,
2% of portfolio)
Holding Period/Exit Strategy: 2+ years; reassess thesis at
least every three months.
BUY 100 shares of OXY at Limit Price of $80.00 ($8,000,
1.75% of portfolio)
Holding Period/Exit Strategy: 2+ years; reassess thesis at
least every three months.
Portfolio Placement / Recommendation





Sector : Energy
Projected Holdings: AMLP, FEN, CVX, PXJ, OXY
Target Sector Allocation: 8.54%, ~$38,860
Projected Sector Allocation: 7.62% , ~$34,660
Remaining Allocation: 1.92%, $4,200