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Chevron: Opportunities, Weaknesses and the Final Word

June 13, 2012 | About:
Muhammad Bazil

Muhammad Bazil

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First Quarter: Long considered one of the world's largest corporations on the globe (after merging with Texaco), Chevron (NYSE:CVX) showed higher gains as prices of crude oil rose for the quarter, enough to offset weaker production, net income totaled $6.47 billion - a 4.19 percent increase from the previous period one year ago.

Despite the positive earnings, the company disappointed analysts, falling 7.8 percent behind expectations of three Bloomberg estimates. Despite the negative fanfare, with $237 billion in sales and a $27 billion market cap, the company stands to profit well from increased oil prices. The company's share price closed last Friday at $100.84, up .45 points, or .45 percent.

Global Crude Production

Last week, according to the US Department of Energy's weekly inventory, stockpiles were down by 111,000 barrels of oil, the first dip in 11 weeks, from a 22-year high. The data provides key insight into the expected production for refinement energy companies like Chevron, Exxon (XOM), ConocoPhillips (COP), Valero (VLO) and Tesoro (TSO). Many cite the decline on the sale of Alaska based Cook Inlet assets, however, crude inventory at the Cushings terminal in Oklahoma, the key delivery point for publicly traded oil saw inventories rise 962 thousand barrels from the week previous, reaching a record 47.78 million barrels.

Brazil Shutdown

Chevron had to close an ocean based well after a leak of nearly 3,000 barrels a day, off the Brazilian coast. The rig operator Transocean (RIG) has not had the best year in terms of ocean related incidents, also being the rig operator during the BP oil spill. Chevron has accepted full responsibility for the incident and has closed the rig, and admitted a miscalculation.

While Transocean may have lost credibility as a rig operator, Chevron should be able to return to the area, the Campos Basin, which produces 80 percent of Brazil's crude. Investors should show frustration but also realize Chevron's international operations account for 71 percent of 2011's total profits. This allows the company to show stability as on shore resources are set to deplete, and oil rich nations may experience geo-political conflicts, like that in Libya.

Eyeing the Pacific & Australia

Chevron, a liquid natural gas provider, is looking to develop into the high demand Asian markets, that seek to purchase LNG in place of an over dependency on coal. In September of last year, the company entered into a joint agreement with Exxon, and Royal Dutch Shell (RDS), to enter the Australian LNG market expected to produce 15 million tons per annum, with Chevron taking a 73 percent stake. The move is expected to boost Chevron's total production 25 million tons per year.

Chevron has recently penned an agreement with Japan based Kyushi Electric to supply 0.7 million tons of LNG per year for 20 years. As Australia continues to be the base of LNG supplies for Asian markets, Chevron maintains a large capacity with its newest investment. The overall market also seems to agree as Japan, the world's largest importer of natural gas, replaces its reliance on nuclear energy with natural gas. With consumption of LNG expected to double in the coming decade, Chevron looks in place to continue profitable long term growth.

Opportunities, Weaknesses and the Final Word

The company stands to hold strong for the coming year maintaining a strong position, replacing 171 percent of the previous year's reserves, over what it had produced the previous year. While refining gets hit the company plans to move itself into the top of the stream opting to work more with LNG and Asian markets that require it. Chevron, with its new Australian plant seeks to gain from these developments, should offset refinement losses.

Risks to the company would include the overall weak economy throughout the world, and the risk of geo-political standoffs that may occur. Still within the next 12 months, crude oil prices are expected to rise. Another indicating strength factor according to the S&P would also show global GDP to rise 2.8 percent this year, and 3.5 percent next year. As onshore supplies begin to wind down, the company has planted itself all over the world and bases 71 percent of its profit outside home operations. With a strong presence in Brazil despite shutdown and a set of small lawsuits, the company stands to benefit in the long run. With strong earnings and an S&P estimated profit per share of $13.35, and a diversified portfolio ranging from risky, cyclical, and safe, the company is on track to continue to grow, buy.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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