Acquisition Bolsters Chevron`s Production by Richard Moroney (11-OCT-05)
While Chevron (NYSE: CVX ) benefits from high energy prices along with the rest of the oil industry, its stock has suffered from concerns regarding the recent $18 billion takeover of Unocal. While actual earnings will hinge on energy prices, the company seems capable of exceeding Wall Street’s expectations given the robust production portfolio it has acquired. Several international projects set to come online in 2006 should further increase production. The stock, rated Buy and Long-Term Buy, earns a 99 Overall Quadrix® score.
Corporate profile
Chevron, the second-largest U.S. oil company, operates in 180 countries and has a presence in most segments of the oil industry. Exploration and production (20% of 2004 revenue, 73% of income) has provided most of Chevron’s profit growth in recent years. Chevron also operates refining-and-marketing (79%, 25%), and chemicals (1%, 2%) businesses. The company made significant divestments of underperforming assets in 2003 and 2004 and has major development projects underway in Kazakhstan, West Africa, and Australia. The realigned portfolio should greatly enhance Chevron’s competitive position and lead to improved production and profit growth.
In August, Chevron acquired Unocal for $18.3 billion in cash, stock, and assumed debt. Unocal controls valuable oil and natural-gas fields in Thailand, the Gulf of Mexico, and the Caspian Sea. Chevron said the acquisition will increase its reserves by about 15% and add to earnings in 2006, needed boosts for a company plagued by declining production from mature fields. Output from Unocal helped offset production declines in Europe in the September quarter, boosting overall production volumes up about 5%.
Hurricanes wreaked havoc on Chevron’s operations in the Gulf. A Pascagoula, Miss., refinery sustained major damage from Katrina and flooding from Rita. The refinery should be fully operational by the middle of November. Rita also ripped Chevron’s Typhoon oil-drilling platform out of its mooring and capsized it. The company has yet to determine whether it can salvage Typhoon, which is floating upside down. Property damage, cleanup, and lost production caused by Katrina and other storms will reduce September-quarter earnings by more than $350 million, or $0.17 per share. The company is still assessing the impact of Rita.
Conclusion
Chevron boasts a healthy balance sheet, with long-term debt representing less than 18% of capital. At the end of June, the company held $12.32 billion ($5.90 per share) in cash and equivalents, an increase of 33% from the end of 2004. Chevron repurchased more than $1.5 billion of its own shares in the first half of 2005 and has already bought back $3.6 billion in shares as part of a $5 billion repurchase program.
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