NYSE: CVX
CHEVRON CORP
Report created Jan 31, 2012 Page 1 OF 6
Chevron is the smallest of the world's five 'super majors' and the second-largest U.S.-based energy
company, after ExxonMobil. It is the result of the 2001 merger of Chevron and Texaco. The company's
operations range from energy exploration and production to refining and retail marketing. Chevron is the
super major most oriented toward the North American market, both upstream and downstream. Southeast
Asia and West Africa are significant international production centers for the company. Chevron acquired
Unocal in August 2005.
Argus Recommendations
Twelve Month Rating SELL HOLD BUY
Five Year Rating SELL HOLD BUY
Analyst's Notes
Sector Rating
Analysis by Philip H. Weiss, CFA, CPA, January 30, 2012
ARGUS RATING: BUY
• Raising 2012 estimate; strong long-term outlook
• Chevron reported 4Q11 earnings of $2.58 per share, down from $3.67 in 3Q11, but up from $2.44 in
4Q10. EPS fell short of both the consensus estimate of $2.84 and our $2.85 forecast.
• The year-over-year improvement was driven by higher crude oil realizations, partly offset by lower
production and weaker refining margins. The sequential decline was attributable to higher upstream
operating expenses, weaker refining margins, and higher corporate charges.
• We are raising our 2012 EPS estimate from $12.60 to $12.70 and setting an initial 2013 estimate of
$13.75; our higher 2013 view primarily reflects upward revisions to our oil price forecast, partly offset
by the impact of weaker projected natural gas prices.
• We believe that Chevron has the strongest long-term production growth profile among the major
integrated companies. Production is currently forecast to grow from 2,763 mboe/d in 2010, to 3,300
mboe/d in 2017, representing annualized growth of about 2.5%.
INVESTMENT THESIS
We are reiterating our $130 target price on BUY-rated Chevron Corp. (NYSE: CVX).
Production from several major projects has started over the last two years, benefiting cash
flow and leaving the company well positioned to fund its next round of projects. In fact,
the new projects could produce more than 900 mboe/d at peak. CVX should realize a
further benefit in that its share of longer-lived projects is increasing. This should result in
lower decline rates - management's base decline outlook is now 3%-4%, down from
5%-6% previously. Chevron is also more highly leveraged to oil prices than peers,
providing an additional advantage in the current environment.
We believe that Chevron has the strongest long-term production growth profile among
the major integrated companies. Production is currently forecast to grow from 2,763
mboe/d in 2010, to 3,300 mboe/d in 2017, representing annualized growth of about 2.5%;
most of this growth is expected to occur in 2014-2017 as a number of projects come on
Market Data
Pricing reflects previous trading week's closing price.
200-Day Moving Average
Target Price: $130.00
52 Week High: $110.99
52 Week Low: $86.68
Closed at $109.08 on 2/24
Price
($)
Under Market Over
Weight Weight Weight
Argus assigns a 12-month BUY, HOLD, or SELL rating to each
stock under coverage.
• BUY-rated stocks are expected to outperform the market (the
benchmark S&P 500 Index) on a risk-adjusted basis over the
next year.
• HOLD-rated stocks are expected to perform in line with the
market.
• SELL-rated stocks are expected to underperform the market
on a risk-adjusted basis.
The distribution of ratings across Argus' entire company
universe is: 46% Buy, 49% Hold, 5% Sell.
Key Statistics
Key Statistics pricing data reflects previous trading day's closing
price. Other applicable data are trailing 12-months unless
otherwise specified
Market Overview
Price
Target Price
52 Week Price Range
Shares Outstanding
Dividend
$103.41
$130.00
$86.68 to $110.99
1.99 Billion
$3.24
Sector Overview
Sector
Sector Rating
Total % of S&P 500 Market Cap.
Energy
OVER WEIGHT
12.00%
Financial Strength
Financial Strength Rating
Debt/Capital Ratio
Return on Equity
Net Margin
Payout Ratio
Current Ratio
Revenue
After-Tax Income
HIGH
9.8%
22.2%
11.4%
0.27
1.68
$236.29 Billion
$26.90 Billion
Valuation
120
Current FY P/E
Prior FY P/E
Price/Sales
Price/Book
Book Value/Share
Market Capitalization
100
80
Rating
BUY
HOLD
SELL
Forecasted Growth
EPS
($)
Quarterly
2.27
2.70
1.88
2.44
3.09
9.28
Annual
3.85
3.67
13.20
2.58
3.05
3.20
3.10
3.36
12.70 ( Estimate)
3.36
3.39
3.29
3.21
13.75 ( Estimate)
Revenue
46.7
51.1
48.6
198.2
51.9
58.4
66.7
61.3
244.4
58.0
63.6
Q1
Q2
Q3
2010
Q4
Q1
Q2
Q3
2011
Q4
Q1
Annual
FY ends
Dec 31
1 Year EPS Growth Forecast
-3.79%
5 Year EPS Growth Forecast
5.00%
1 Year Dividend Growth Forecast
12.62%
Risk
($ in Bil.)
Quarterly
8.14
7.83
0.87
1.70
$60.70
$205.94 Billion
61.1
59.1
66.8
250.6 ( Estimate)
Q2
Q3
2012
Q4
62.3
Q1
62.3
62.3
62.3
249.3 ( Estimate)
Q2
Q3
2013
Beta
Institutional Ownership
1.04
62.69%
Q4
Please see important information about this report on page 6
©2012 Argus Research Company
Argus Analyst Report
NYSE: CVX
CHEVRON CORP
Report created Jan 31, 2012 Page 2 OF 6
Analyst's Notes...Continued
line. The stock's attractive dividend yield of about 3.1% adds to its
total return potential.
Chevron has a strong balance sheet, a large cash balance, and
solid cash flow, which should enable it to advance projects through
its queue without meaningfully increasing leverage. While capital
spending is expected to ramp up over the next few years as
development activity increases, particularly in Australia and the
Gulf of Mexico, CVX's strong balance sheet and industry leading
profitability per barrel leave it well positioned to fund its capital
projects.
RECENT DEVELOPMENTS
Chevron reported 4Q11 earnings of $2.58 per share, down
from $3.67 in 3Q11, but up from $2.44 in 4Q10. EPS fell short of
both the consensus estimate of $2.84 and our $2.85 forecast.
Relative to our outlook, the 4Q performance reflected modestly
weaker production and downstream results, along with a
higher-than-anticipated effective tax rate and higher exploration
and operating expenses. The year-over-year improvement was
driven by higher crude oil realizations, partly offset by lower
production and weaker refining margins. The sequential decline
was primarily attributable to higher upstream operating expenses,
weaker refining margins, and higher corporate charges. Chevron's
effective tax rate was higher in 4Q11, particularly compared to
3Q11, primarily due to the weak downstream results and the 3Q11
sale of its Pembroke refinery in the U.K. Typically, downstream
operations are taxed at a lower rate than upstream activities. For
2011, Chevron's effective tax rate was about 43%, which is
consistent with management's guidance.
Sales and other operating revenues fell 5% sequentially, but rose
12% year-over-year to $58.0 billion. On a year-over-year basis,
sales benefited from higher prices for crude oil and refined
products, more than offsetting the negative impact of a production
decline.
For all of 2011, CVX generated operating earnings of $13.20
per share, up 42% from 2010. Sales and other operating revenues
jumped 23% to $244.4 billion. Operations benefited from higher
prices for crude oil and refined products, which outweighed
increases in crude acquisition costs and operating expenses.
Production fell 3.3% to 2,673 thousand barrels of oil equivalent
per day (mboe/d). In 2011, the negative impact of price effects
(higher prices reduced the number of barrels received under
production-sharing and other similar contracts by 32 mboe/d) and
normal field decline more than offset benefits associated with major
capital projects, including the ramp-up of Platong II (Thailand),
Perdido (U.S. Gulf of Mexico) and Athabasca Oil Sands (Canada).
Upstream earnings in 4Q11 were $5.7 billion, up from $4.8
billion a year earlier. The improvement primarily reflected higher
crude oil realizations, partly offset by lower production. Earnings
from U.S. operations were $1.6 billion, compared to $930 million a
year earlier, as the benefit of higher crude oil realizations more
than offset the negative impact of weaker production. Earnings
Growth & Valuation Analysis
GROWTH ANALYSIS
($ in Millions, except per share data)
Revenue
COGS
Gross Profit
SG&A
R&D
Operating Income
Interest Expense
Pretax Income
Income Taxes
Tax Rate (%)
Net Income
Diluted Shares Outstanding
EPS
Dividend
GROWTH RATES (%)
Revenue
Operating Income
Net Income
EPS
Dividend
Sustainable Growth Rate
VALUATION ANALYSIS
Price: High
Price: Low
Price/Sales: High-Low
P/E: High-Low
Price/Cash Flow: High-Low
Financial & Risk Analysis
2007
220,904
151,564
69,340
5,926
—
32,440
166
32,167
13,479
42
18,688
2,132
8.77
2.26
2008
273,005
171,397
101,608
5,756
—
43,057
2010
204,928
116,467
88,461
4,767
—
32,055
50
32,055
12,919
40
19,024
2,007
9.48
2.84
2011
253,706
149,923
103,783
4,745
—
47,634
43,057
19,026
44
23,931
2,050
11.67
2.53
2009
171,636
99,653
71,983
4,527
—
18,528
28
18,528
7,965
43
10,483
2,001
5.24
2.66
4.5
-0.2
9.0
12.4
12.4
19.0
23.8
32.7
28.1
33.1
11.9
22.9
-36.8
-57.0
-56.2
-55.1
5.1
5.8
18.4
73.0
81.5
80.9
6.8
13.5
—
—
—
—
—
18.9
$95.50
$64.99
0.9 - 0.6
10.9 - 7.4
8.1 - 5.5
$104.63
$55.50
0.8 - 0.4
9.0 - 4.8
7.2 - 3.8
$79.82
$56.12
0.9 - 0.7
15.2 - 10.7
8.2 - 5.8
$92.39
$66.83
0.9 - 0.7
9.7 - 7.0
5.9 - 4.3
$110.01
$86.68
—-—
—-—
5.5 - 4.3
47,634
20,626
—
26,895
—
—
—
FINANCIAL STRENGTH
2009
2010
2011
Cash ($ in Millions)
8,716 14,060 15,864
Working Capital ($ in Millions) 11,005 19,829 19,634
Current Ratio
1.42
1.68
—
LT Debt/Equity Ratio (%)
11.0
10.7
—
Total Debt/Equity Ratio (%)
11.4
10.9
—
RATIOS (%)
Gross Profit Margin
Operating Margin
Net Margin
Return On Assets
Return On Equity
41.9
10.8
6.1
6.4
11.7
43.2
15.6
9.3
10.9
19.3
—
—
—
—
—
RISK ANALYSIS
Cash Cycle (days)
Cash Flow/Cap Ex
Oper. Income/Int. Exp. (ratio)
Payout Ratio
-2.1
—
—
21.7
-4.4
—
—
50.8
—
—
—
30.0
The data contained on this page of this report has been
provided by Morningstar, Inc. (© 2012 Morningstar, Inc.
All Rights Reserved). This data (1) is proprietary to
Morningstar and/or its content providers; (2) may not be
copied or distributed; and (3) is not warranted to be
accurate, complete or timely. Neither Morningstar nor its
content providers are responsible for any damages or
losses arising from any use of this information. Past
performance is no guarantee of future results. This data
is set forth herein for historical reference only and is not
necessarily used in Argus’ analysis of the stock set forth
on this page of this report or any other stock or other
security. All earnings figures are in GAAP.
Please see important information about this report on page 6
©2012 Argus Research Company
Argus Analyst Report
NYSE: CVX
CHEVRON CORP
Report created Jan 31, 2012 Page 3 OF 6
Analyst's Notes...Continued
from international operations rose $215 million from last year,
primarily due to higher realizations for crude oil, partly offset by
higher tax charges, lower volumes and increased operating
expenses.
The average price for crude oil and natural gas liquids from
international operations in 4Q11 was about $101 per barrel,
versus $79 a year earlier. Natural gas prices averaged $5.55 per
mcf versus $4.81 in the year-earlier period. The average sales price
per barrel of crude oil and natural gas liquids from U.S. operations
was $101, compared to $76 a year earlier. Natural gas prices
averaged $3.62 per mcf, down $0.03 from 4Q10. Historically,
Chevron's crude realizations in the U.S. have roughly tracked the
price of West Texas Intermediate crude. However, in 2011, an
inventory overhang in Cushing, Oklahoma (where WTI is stored)
broke down the historical relationship between WTI and other
crudes. In 4Q11, WTI prices increased 11% on average while
Chevron's average realizations jumped 32%. Chevron's
international production more closely tracks movements in Brent.
Realized prices rose 28% year-over-year, modestly surpassing the
26% increase in Brent.
Worldwide production was 2.64 mboe/d in 4Q11 versus 2.79
mboe/d a year earlier. Production gains associated with project
ramp-ups in Thailand, the U.S., Nigeria, and Brazil, and new
volumes resulting from acquisitions in the Marcellus shale were
more than offset by normal field declines, maintenance-related
downtime, and a 25 mboe/d decline related to the negative impact
of higher prices on entitlement volumes.
On a per barrel basis, Chevron's 4Q11 upstream earnings were
$23.61. We expect this to mark the tenth consecutive quarter in
which the company has outperformed competitors, including
former leader ExxonMobil, on this metric. Despite this strong
performance, CVX's 4Q11 net income per barrel was down from
$25.94 in 3Q11. The decline was primarily attributable to higher
taxes, particularly in the U.K., as well as to higher exploration
expenses (exploration expenses are typically highest in the fourth
quarter) and smaller gains on asset sales. We note that almost 70%
of Chevron's volumes are liquids, while a little less than 50% of
Exxon's volumes are liquids. The benefit of this difference can be
seen in per barrel profitability, since in the current environment, oil
production is much more lucrative. We also note that Chevron's
capture rate (profit per barrel compared to realization per unit) was
24% in 4Q11, compared to 26% in the preceding quarter and
25% in the year-ago period.
Chevron's Refining & Marketing segment posted a net loss of
$61 million in 4Q11, versus net income of $2.0 billion in 3Q11
and $742 million in 4Q10. Downstream results were hampered by
dramatically lower margins and weaker demand as well as by the
absence of 3Q11 asset sale gains. In the U.S., the net loss was $204
million, versus net income of $475 million in 4Q10. The decline
primarily reflected the absence of a $400 million gain on the 4Q10
sale of CVX's ownership interest in the Colonial Pipeline
Company, and weaker margins on refined product sales.
Peer & Industry Analysis
Ticker Company
XOM Exxon Mobil Corp
RDS.A Royal Dutch Shell Plc
CVX Chevron Corporation
BP
BP Plc
Peer Average
Growth
More Growth
CVX vs.
Market
CVX vs.
Sector
More Value
More Growth
Price/Book
7.5
CVX vs.
Market
CVX vs.
Sector
BP
Value
5
5.5
6
5-yr
Growth
Rate (%)
6.0
6.0
5.0
5.0
5.5
Current
FY P/E
10.2
8.2
8.1
6.6
8.3
Net
Margin
(%)
9.8
5.5
11.4
6.4
8.3
1-yr EPS
Growth
(%)
-2.6
2.0
8.3
-5.3
.6
More Value
More Growth
More Value
More Growth
PEG
6.5
5-yr Growth Rate(%)
Market Cap
($ in Millions)
409,771
223,816
205,939
139,468
244,749
CVX vs.
Market
CVX vs.
Sector
Price/Sales
RDS.A
CVX
P/E
More Value
XOM
10
P/E
The graphics in this section are designed to
allow investors to compare CVX versus its
industry peers, the broader sector, and the
market as a whole, as defined by the Argus
Universe of Coverage.
• The scatterplot shows how CVX stacks up
versus
its
peers
on
two
key
characteristics: long-term growth and
value. In general, companies in the lower
left-hand corner are more value-oriented,
while those in the upper right-hand corner
are more growth-oriented.
• The table builds on the scatterplot by
displaying more financial information.
• The bar charts on the right take the
analysis two steps further, by broadening
the comparison groups into the sector
level and the market as a whole. This tool
is designed to help investors understand
how CVX might fit into or modify a
diversified portfolio.
Argus
Rating
BUY
HOLD
BUY
HOLD
CVX vs.
Market
CVX vs.
Sector
5 Year Growth
CVX vs.
Market
CVX vs.
Sector
More Value
More Growth
Debt/Capital
CVX vs.
Market
CVX vs.
Sector
More Value
More Growth
Please see important information about this report on page 6
©2012 Argus Research Company
Argus Analyst Report
NYSE: CVX
CHEVRON CORP
Report created Jan 31, 2012 Page 4 OF 6
Analyst's Notes...Continued
International downstream operations generated income of $143
million, down from $267 million in the year-ago period. The
decrease was mostly due to weaker margins. Foreign currency
effects lowered earnings by $81 million in 4Q11, compared to a
$52 million decrease in the year-earlier period.
EARNINGS & GROWTH ANALYSIS
We are raising our 2012 EPS estimate from $12.60 to $12.70
and setting an initial 2013 estimate of $13.75; our higher 2013
view primarily reflects upward revisions to our oil price forecast,
partially offset by the impact of weaker projected natural gas
prices. We forecast average production in 2012 of about 2.7
mmboe/d, up less than 1% from 2011 and largely in line with
guidance. As in the company's actual 2011 results, management's
guidance assumes a 4% base decline rate and an average price for
Brent crude of $111 per barrel (our current estimate is $110).
Normal decline should be offset by the positive contributions from
the startup of the Angola LNG and Usan (Nigeria) liquids projects.
A turnaround at Tengiz in 3Q12 is expected to last six weeks,
helping to limit production growth in 2012. Chevron's success in
keeping its decline rate in the 4%-5% range or lower is principally
related to the reliability and production efficiency of its operations.
Management estimates that production efficiency increases volumes
by about 2%. As a result, the loss from the decline rate has been
offset by greater efficiency and reliability in the company's base
business operations. In effect, CVX is getting more barrels without
additional spending, enhancing margins.
Over the long term, Chevron's production is forecast to grow
from 2,763 mboe/d in 2010 to 3,300 mboe/d in 2017, representing
annualized growth of about 2.5%. This outlook is based on a $79
crude price. The growth is expected to accelerate to the 4%-5%
range in 2014-2017 due to new production associated with the
Gorgon and Wheatstone liquefied natural gas projects in Australia.
Primarily due to these large projects, natural gas should increase
from about 30% of production in 2011 to approximately 40% by
2017.
Given the company's deep pipeline, we believe that Chevron
will continue to focus on organic growth projects rather than
acquisitions, which will have to offer better returns than organic
opportunities to justify the investment. During 2010, Chevron was
able to make an opportunistic acquisition, taking advantage of the
weak natural gas price environment to acquire Atlas Energy. We
have a similar view of its more recent acquisition of additional
Marcellus acreage. Given its strong cash position, we think that
Chevron could be interested in acquiring additional unconventional
assets -- it already owns about 8 million acres of shale worldwide,
including in the U.S., Canada and Poland. However, we don't
expect CVX to enter into any joint ventures where it is not the
operator. If it were to make an acquisition, we believe that it would
be interested in acquiring a distressed company, or assets in a field
that another firm was seeking to exit. We expect to hear more
about CVX's shale strategy at its analyst meeting in March.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating for Chevron remains High, our
top rank. The major credit rating agencies rate its long-term debt as
AA with a stable outlook. The company's total debt/capital ratio
was about 14% at the end of 4Q11. Unlike most other analysts on
the Street, when determining Chevron's total debt, we include its
obligations under operating leases and the excess of its defined
benefit pension obligations over the fair value of the underlying
assets. While the operating leases are not currently found on the
balance sheet, we take a conservative approach and include them in
our computations. It should be noted that recently proposed
legislation would change the accounting treatment for leases and
require companies to report debt related to all leases on their
balance sheets.
On a trailing four-quarter basis, Chevron's operating margin of
20% is currently the highest in its peer group, slightly ahead of
ExxonMobil. Because we believe a major acquisition is unlikely, we
do not expect any significant erosion in the company's financial
position in the near term. However, we think the company is
interested in increasing its exposure to unconventional acreage.
The company's financial priorities are to maintain and grow the
dividend, fund the capital program, maintain financial strength,
and return surplus cash to shareholders. Growing and maintaining
the dividend, funding capital projects and ongoing working capital
requirements, maintaining cash balances that will allow it to
weather any downturn, and funding the pension plan all take
priority over share buybacks. Unlike some peers, management is
adamant that it does not wish to clear excess cash from its balance
sheet via share repurchases. Instead, it prefers to move at a more
measured pace, allowing the program to be more sustainable at
relatively constant levels. After refraining from buyback activity for
some time, CVX announced plans to begin repurchasing stock in
4Q10. It repurchased $1.25 billion in stock in 4Q11 and is
targeting another $1.25 billion in 1Q12. Given that CVX decided
to acquire Atlas Energy for $3.2 billion in cash rather than shares,
the resumption of buybacks suggests that management believes the
shares are undervalued.
Chevron currently pays a dividend or $0.81 per share, for a
yield of about 3.1%. We project total dividends of $3.48 for 2012
and $3.83 for 2012. Historically, the company has increased its
dividend at about a 7% annualized rate. Based on management's
comments about cash distributions and its cash balance, we expect
to see bigger increases going forward. We also favor this approach,
as we believe higher dividends signal management's confidence in
future cash flow generation. This belief is based on our observation
that the market punishes companies that reduce dividends, but
barely notices when actual buybacks fall short of planned
repurchases. As a result, many companies raise dividends very
conservatively to avoid the fallout that would come from a
dividend cut. Based on our recent discussion with management, we
believe the rate of annual dividends will increase. Current CEO
John Watson appears to place greater weight on dividends than did
his predecessor.
CVX's operating cash flow has been consistently greater than its
net income, and it generates strong free cash flow. We expect it to
remain free cash flow-positive in 2012 and 2013. At the end of
4Q11, the company had net cash of about $10 billion. CVX also
has a $6 billion credit line. Management views its more
conservative balance sheet as a competitive advantage. It allows it
to ensure funding of its capital projects, pay a growing dividend,
and even repurchase shares if cash levels are sufficient. Its strong
cash balance also provides CVX with the resources to add to its
portfolio should the opportunity arise. When CVX's large projects,
such as Gorgon (2014) and Wheatstone (2016) come on line, its
upstream cash flow should increase significantly. Depending on
what its project pipeline looks like at that time, there could be a
Please see important information about this report on page 6
©2012 Argus Research Company
Argus Analyst Report
NYSE: CVX
CHEVRON CORP
Report created Jan 31, 2012 Page 5 OF 6
Analyst's Notes...Continued
significant increase in cash returns to shareholders.
MANAGEMENT & RISKS
Chevron continues to make great strides in transitioning out of
the mature producing basins of North America and Europe and
into regions with higher growth potential. Both Chevron's OECD
and legacy project production are expected to increase as a
percentage of total production over the next seven years.
Production from OECD countries is expected to increase from 37%
in 2010 to 40% in 2017, and production from legacy projects
(those with long-term, sustained production profiles) is expected to
increase from about 40% in 2010 to more than 50% by 2017.
We expect new regulations to be issued in the wake of the BP oil
spill, which are likely to raise the cost of future deepwater drilling
activity. Smaller spills in China, Brazil and, most recently, Nigeria
are likely to increase calls for stronger regulation. While these
incidents have been significantly smaller than Macondo, the
reaction of governments in China and Brazil underscores the
heightened level of regulatory scrutiny.
Over time, there has been a greater call in Brazil for Petrobras
to serve as operator and have majority control on local projects.
Local content requirements for rigs working in the country are also
an issue, and the harsh comments from Brazilian officials about
Chevron's spill in Brazil may indicate that the government is
looking to push foreign-owned oil companies out of the country.
We have discussed this issue with several companies operating in
the region, including those with assets for sale, though it remains to
be seen whether our concerns are justified.
Chevron operates in some countries with a history of official
corruption and in others that are prone to political upheavals. At
the same time, its broad presence reduces the impact of each
individual risk. Like its peers, CVX operates in a commodity
business where it ultimately has little control over the price of the
products its sells. As a result, the company budgets its projects
based on a range of oil prices, increasing its confidence that its
projects will be profitable in any market environment. We believe
the company's strong balance sheet will help insulate it from the
risk associated with such price swings.
Over the past few years, there has been considerable controversy
related to the company's Ecuador lawsuit. According to one
'expert' opinion, CVX's liability is $27 billion. Chevron has no
assets in Ecuador and maintains that the court there has no
jurisdiction over it. Most recently, the three judges presiding over
appellate proceedings in the case upheld a lower court ruling, from
February 2011, ordering CVX to pay $18 billion in damages.
Chevron continues to dispute the validity of the ruling. While the
lawsuit increases headline risk, we believe the case will not be
resolved for some time. During its 4Q11 conference call,
management provided its strongest rebuke of the judgment thus
far, calling it a fraud. While there may be some interest in a
settlement in order to reduce headline risk, this appears unlikely in
the near term.
Our valuation model is multistage, including peer analysis,
relative valuation metrics and discounted cash flow modeling. The
trailing P/E of 7.7 is in the lower half of the five-year historical
range of 4.8-16.7. The price/cash flow ratio of 4.4 is toward the
low end of the range of 3.8-18.7, while the price/sales multiple of
0.9 is near the high end of the range of 0.4-1.0. Finally, the
price/book multiple of 1.6 is below the midpoint of the range of
1.3-2.7. Our discounted cash flow model also suggests the potential
for appreciation, and the shares appear undervalued relative to
peers.
At our $130 target price, CVX shares would trade at 10.2-times
our revised 2012 estimate and at 9.5-times our 2013 estimate. The
stock's attractive dividend yield of about 3.1% adds to its total
return potential.
On January 30, BUY-rated CVX closed at $103.41, down
$0.55.
VALUATION
CVX is trading in the upper half of its 52-week range of
$86.68-$110.99, and has surpassed its 2008 high of $104.63. It
reached a new high in midday trading on January 3. CVX rose
17% in 2011, making it the second-best performer among the
Energy stocks in our coverage universe. The shares are down about
3% thus far in 2012.
Please see important information about this report on page 6
©2012 Argus Research Company
Argus Analyst Report
NYSE: CVX
METHODOLOGY & DISCLAIMERS
Report created Jan 31, 2012 Page 6 OF 6
About Argus
Argus Research, founded by Economist Harold Dorsey in 1934,
has built a top-down, fundamental system that is used by Argus
analysts. This six-point system includes Industry Analysis, Growth
Analysis, Financial Strength Analysis, Management Assessment,
Risk Analysis and Valuation Analysis.
Utilizing forecasts from Argus’ Economist, the Industry Analysis
identifies industries expected to perform well over the next
one-to-two years.
The Growth Analysis generates proprietary estimates for
companies under coverage.
In the Financial Strength Analysis, analysts study ratios to
understand profitability, liquidity and capital structure.
During the Management Assessment, analysts meet with and
familiarize themselves with the processes of corporate management
teams.
Quantitative trends and qualitative threats are assessed under
the Risk Analysis.
And finally, Argus’ Valuation Analysis model integrates a
historical ratio matrix, discounted cash flow modeling, and peer
comparison.
THE ARGUS RESEARCH RATING SYSTEM
Argus uses three ratings for stocks: BUY, HOLD, and SELL.
Stocks are rated relative to a benchmark, the S&P 500.
• A BUY-rated stock is expected to outperform the S&P 500 on
a risk-adjusted basis over a 12-month period. To make this
determination, Argus Analysts set target prices, use beta as the
measure of risk, and compare expected risk-adjusted stock
returns to the S&P 500 forecasts set by the Argus Market
Strategist.
• A HOLD-rated stock is expected to perform in line with the
S&P 500.
• A SELL-rated stock is expected to underperform the S&P 500.
Argus Research Disclaimer
Argus Research is an independent investment research provider and is not a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have
investment banking operations. The Argus trademark, service mark and logo are the intellectual property of Argus Group Inc. The information contained in this research report is
produced and copyrighted by Argus, and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report
may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable,
but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. This report is not an offer to sell or a solicitation of
an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives,
financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for
you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may
have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the
original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any
loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an
investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research
since 1934. Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may
serve as officers or directors of covered companies, or may own more than one percent of a covered company’s stock.
Morningstar Disclaimer
© 2012 Morningstar, Inc. All Rights Reserved. Certain financial information included in this report: (1) is proprietary to Morningstar and/or its content providers; (2) may not be
copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising
from any use of this information. Past performance is no guarantee of future results.
©2012 Argus Research Company
Argus Analyst Report