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Investment Overview for Chevron (NYSE:CVX)
Below are key drivers of Chevron's value that present opportunities for an upside or downside to the current Trefis price estimate for Chevron:
- Upstream EBITDA Margin: Chevron's upstream division's EBITDA Margin increased from in ~32% in 2009 to 34.2% in 2013, primary reflecting the increase in average price realizations for liquids (Crude oil & NGL). We currently estimate upstream EBITDA margins to gradually improve to around 35% by the end of the Trefis forecast period on improving price realizations. However, if prices do not increase at the rate projected, and EBITDA margin gradually decreases to around 28% by the end of our forecast period, there would be a 10% downside to our Trefis prices estimate. On the other hand, if prices increase more than expected, resulting in a higher EBITDA margin of 40%, there would be a 10% upside to the Trefis price estimate.
- Downstream EBITDA Margin: While Chevron's downstream division, which primarily manufactures and sells refined products and petrochemicals, constituted ~47% of company revenues but just around 7.5% to total EBITDA in 2013. This is primarily due to the low EBITDA margins of the division. EBITDA margins for the division depend on the price differential between input (crude oil, ethanol etc.) and output (gasoline, kerosene, ethylene etc.). Going forward, we expect downstream margins to remain under pressure (at around 3.5%) due to overcapacity in the global refining market, higher crude oil prices and declining demand for gasoline in developed markets. However, if downstream EBITDA margins fall to lower levels such as to 2%, there would be a 10% downside to the Trefis price estimate. On the other hand, in a scenario where downstream EBITDA margins increase and reach around 5% by the end of the forecast period due to a combination of increasing demand for refined products in emerging markets, there would be a 10% upside to the Trefis forecast period.
For additional details, select a driver above or select a division from the interactive Trefis split for Chevron at the top of the page.
Chevron Corporation is the second largest energy company in the U.S., after Exxon Mobil. The company manages its investments in subsidiaries and affiliates and provides administrative, financial, management and technology support to U.S. and international subsidiaries that engage in fully integrated petroleum, chemicals and mining operations, as well as power generation and energy services.
Chevron has operations in 180 countries along with a strong network of retail gas stations under Chevron, Texaco, and Caltex brands.The company is also involved in pursuing alternative energy solutions.
Crude Oil and Natural Gas Liquids production is by far the most valuable segment for Chevron for the following reasons:
Higher profitability compared to downstream activities like refining
Although, the revenues attributed to crude oil and NGL production are less when compared to downstream businesses like refined product sales, the profitability is much higher. We estimate that EBITDA margins for crude oil and NGL production were a little over 34% in 2013 compared to only 2.9% for refined product sales.
The difference in margins is attributable to the fact that the cost of production per barrel is quite low for crude oil compared to its selling price. For 2013, the company's average selling price for crude oil was around $99 per barrel when average production costs were only $10 per barrel.
Chevron is trimming its downstream business,plans to focus more on upstream
In early 2010, Chevron announced its business strategy of trimming down its downstream business which consists of refining, marketing and transportation operations. This segment has struggled when it comes to profitability. Margins were just around 2.9% in 2012. The company has been cutting employee count in its downstream business and plans to focus on the more profitable Oil & Natural gas exploration and production business.
Chevron is also embracing alternative energy solutions
Even though Chevron's business is dependent on non-renewable energy sources such as crude oil and natural gas, the company is also focused on embracing alternative energy solutions. Chevron's Global Power Company has 13 power assets worldwide with a total power generation capacity of 3,100 megawatts. 12 of these utilize recovered waste heat to produce electricity, and the 13th is a wind farm. Chevron is also involved in R&D in solar power generation and alternative fuel sources such as biofuels and fuel cell technology.
Increasing costs associated with upstream activities
The costs associated with constructing new oil and gas upstream facilities have reached a new record high, according to an analysis by Cambridge Energy Research Associates (CERA). According to the analysis, costs related to the extraction of oil & gas has doubled since 2005.
This has been primarily due to the growing complexity of upstream projects. Various oil companies have embarked on different projects to extract oil such as deepwater, GTL, oil sands, etc. This has led to longer development time lines which have in turn resulted in higher costs.
It is estimated that a large part of the world's oil reserves have already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.
However, many institutions such as the International Energy Agency (IEA) believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand of energy will be met at all times to come.
Improvements in technology
Due to limited underlying growth in product demand, there has been an increase in recent years towards increasing the complexity of refineries rather than expanding capacity. In the US, no new refineries have been built since 1980, however improvements in process design and technology has seen capacity increase around 1% per year.
The early refineries that were established were mainly used to process light sweet crude resulting in an increase in demand for light sweet crudes. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. In addition, the interest in the development of new cost effective methods for extracting and transporting heavy crude oil for refining into valuable light and middle distillate fuels is also increasing.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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