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Bull of the Day: Chevron (CVX)

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Chevron (CVX - Free Report) , a Zacks Rank #1 (Strong Buy) is one of the world's leading integrated energy companies. Through its subsidiaries that conduct business worldwide, the company is involved in virtually every facet of the energy industry. Chevron explores for, produces and transports crude oil and natural gas; refines, markets and distributes transportation fuels and lubricants; manufactures and sells petrochemicals and additives; generates power; and develops and deploys technologies that enhance business value in every aspect of the company's operations.

Recent Earnings Data

In the company’s most recent earnings report, it beat both the top and bottom line expectations for the third consecutive quarter.  Earnings improved by +51.5% YoY while revenues were up +20.1% YoY.  The growth was driven by higher commodity prices (oil), and increased production volumes.  Management commented that they were “ramping up” LNG projects in Australia, and that they have been successful with their ongoing cost cutting efforts.

Growth Drivers

The big driver behind CVX’s sustained upturn has been the price of oil.  Oil recently broke $63 per barrel level for the first time in three and a half years.  Further, recent news items have indicated that the price per barrel will continue to rise through 2018.  

Early this week, the Energy Information Administration once again increased its price per barrel of oil expectations for 2018, after increasing its expectations December; West Texas Intermediate (WTI) up another +4.8%, and Brent crude was lifted another +4.3%.  The EIA also anticipates that the U.S. will now produce 10.27 million barrels per day in 2018, up from the 10.1 million expectation in December.  This is the highest estimate for annual production since the EIA started tracking production in 1983.  

Also, President Trump’s recent tax plan included opening the ANWR Alaska area for exploration and drilling.  This has a lot of potential for companies like Chevron, but the President didn’t stop at Alaska, he also expanded offshore drilling to almost all U.S. coastal waters. According to the report the Interior Department is proposing 47 auctions of drilling rights in the near future.  

Management’s Take

According to John Watson, Chairman and CEO, “We continue to see improvement in the underlying pattern of earnings and cash flow.  Cash flow is at a positive inflection point, with oil and gas production increasing and capital spending falling. We’re completing projects that have been under construction and ramping up production, notably at our Gorgon LNG Project in Australia. And our shale and tight rock drilling activity in the Permian Basin is exceeding expectations. We expect this pattern to continue.”

Price and Earning Consensus Graph

As you can see in the graph below, the sustained uptick in oil prices, and prudent cost management as caused the stock price to increase during the second half of 2017.

Chevron Corporation Price and Consensus

Chevron Corporation Price and Consensus | Chevron Corporation Quote

Increasing Earnings Estimates

Over the past 60 days, earnings estimates for Q4 17, Q1 18, FY 17, and FY 18 have all been positively revised; Q4 17 improved from $1.10 to $1.27, Q1 18 rose from $1.32 to $1.37, FY 17 was lifted from $4.27 to $4.35, and FY 18 jumped up from $5.01 to $5.60

Chevron currently pays an annual dividend yield of +3.36%, and reports Q4 17 results on February 2nd before the market opens.

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