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Chevron Goes for the Long-Term – Brazil Emerges as Major Oil Reserve
Posted by: Victor Selva (IP Logged)
Date: January 13, 2014 11:30AM

Brazilian offshore exploration over the past years has turned the South American bull into one of the fastest growing economies, as well as the 10th largest oil producer in the world. This, of course, is no news if we take into account the radical increase in revenues and steady growth of long-term assets shown by local enterprises, such as Petroleo Brasileiro SA Petrobras (PBR)

Long-term assets have doubled since 2009, as Brazil continues to develop its methods of resource extraction. The revenue downfall is mostly explained by the recession of 2009, but revenues recovered rapidly, rising to similar levels by the end of 2010.

Naturally, this discovery has attracted industry veteran Chevron Corp (CVX) which holds 37.5% of Papa-Terra, a field that achieved first oil on early November 2013, and is expected to produce 140,000 barrels daily. Chevron also owns subsidiaries in several locations, such as Frade (51.7%) and Maromba (30%), although this last one still needs approval to commence operations.

Although 2012 seemed rather stagnant or less appealing than previous years, the  investments in Brazilian fields are just a few of Chevron’s assets aiming to guarantee a favorable long-term market share. These steps Chevron is taking to increase its operations in peripheral countries should have optimistic feedback, since oil industry is quickly recovering from the slowdown in 2009.

An Extensive Portfolio and Background Overview

Chevron is well known for its active participation in emerging markets, such as the development of the Gorgon and Jansz-Io gas fields in Western Australia. And,  particularly in Latin America where it first ventured on Argentina’s YPF on its own in contrast with more conservative industry giants which considered it too risky. The successful exploration in the Gulf of Mexico is also promising. It’s important to take into account how Chevron has focused on upstream operations, since refining and distribution have proven to be less profitable due to commodity price rigidity in such a competitive market.

There’s also the fact that Chevron exhibits a price to earnings below industrial average (10.10 vs. 11.10), and if we were to compare it to Exxon Mobil Corporation (XOM)’s 13.10, it looks even more tempting. Another critical indicator concerns the earnings per share growth: Chevron is higher than 94% of the companies providing global integrated gas and oil production (36.5% vs. industry median 15.8%).

Reinforcing Investments

After selling out his 250,000 shares by the end of 2012 (probably anticipating a less profitable 2013), guru John Hussman (Trades, Portfolio) bought back into Chevron at the end of last year’s third quarter. Dodge & Cox is also optimistic, as its 12 million share position demonstrates. On the other hand, investor James Barrow (Trades, Portfolio) seems to take an opposite stance, critically reducing his share amount by the end of the second quarter, probably fearing stagnation in oil industry revenues and stock prices.

Due to its relatively low price to earnings ratio and high earnings per share, Chevron stands out as a profitable veteran. Also, the firm might be able to keep its growth for quite some time, especially if its investments in developing countries are as successful as output projections predict.

Disclosure: Victor Selva holds no position in any stocks mentioned.

Guru Discussed: Dodge & Cox: Current Portfolio, Stock Picks
James Barrow: Current Portfolio, Stock Picks
Stocks Discussed: XOM, CVX, PBR,
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