We have maintained our Neutral recommendation on U.S. energy giant Chevron Corp. (CVX) with a price target of $103.0.
San Ramon, California-based Chevron is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses.
Chevron, in its present form, resulted from the 2001 merger between Texaco and Chevron Corporation. The company divides its operations into three main segments: Exploration and Production; Manufacturing, Products, and Transportation; and Other Businesses.
Its current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, Chevron possesses one of the healthiest balance sheets in its peerage, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.
The resumption of the buyback program not only highlights the company’s commitment to create value for shareholders but also underlines the oil giant's confidence in commodity prices. Additionally, Chevron’s strategic initiatives – aggressive cost reduction initiatives, exiting unprofitable markets and streamlining the organization – are expected to have long-term positive effects for the firm.
In the recently released June quarter results, the second-largest U.S. oil company by market value after ExxonMobil Corp. (XOM) reported a jump in its profits, benefiting from higher oil prices and stronger refining margins. Earnings per share (excluding adjustments for foreign-currency effects) came in at $3.89, easily above the Zacks Consensus Estimate of $3.55 and the year-ago adjusted profit of $2.58. Quarterly revenue rose 30.1% year-over-year (from $53,004.0 million to $68,948.0 million) and was 7.9% above our projection.
However, being one of the largest integrated oil and gas companies in the world, Chevron is particularly susceptible to the downside risk from the current turmoil in the global economy. We are also concerned by the group’s high level of capital spending, which may result in reduced returns going forward.
Chevron has pegged its 2011 capital budget at $26 billion – up more than 20% from $21.6 billion it expects to invest by the end of 2010, which is quite high by industry standards and puts its expenditure near that of industry leader ExxonMobil. This is expected to substantially increase Chevron’s leverage and sully its credit metrics.
Considering these factors, we see Chevron shares performing in line with the broader market. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).
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