Why We Believe Chevron’s Stock Is Worth $95

Chevron (NYSE:CVX) is the second largest energy company in the U.S., after Exxon Mobil (NYSE:XOM). The company has been hit hard by the current downtrend of low crude oil prices and its average price realizations in both upstream and downstream segments have suffered as a result. Consequently, we believe that Chevron’ Trefis adjusted total revenue for the year 2015 will decline by 36% as compared to last year and amount to $166 billion (Calculated revenue figure not subjected to any intersegment elimination). However, we believe that a gradual recovery in oil prices in subsequent years will lead to a period of growth in Chevron’s revenues and the company’s revenues will exceed $275 billion by the end of our forecast period. Our price target for Chevron stands at $95, implying a premium of more than 20% to the market. In this piece, we try to analyze some of the key drivers we have used in our valuation of Chevron.

See Our Complete Analysis For Chevron

Oil Prices Will Hurt Chevron’s Average Realizations Per Barrel In Near Term

Chevron’s upstream operations constitute close to two-thirds of the stock’s value, according to our estimates. We calculate that the company earned around $76.3 billion in adjusted upstream revenues in 2014. However, the extended period of low crude oil prices has hurt the company’s upstream operations in 2015. Even though Chevron has increased daily crude oil and NGL production by 3% in 1H-2015 compared to 1H-2014, the company’s average price realized per barrel of oil equivalent (BOE) has dropped below $50 as compared to $97 in the previous year period. ^[1] The average crude oil price has remained below $60 for the year to date and we believe that prices will not experience any significant recovery for the rest of the year due to the ongoing production related stand-off between OPEC and Non-OPEC producers. Consequently, we believe that Chevron’s Average Liquids Price Realization will amount to less than $50 for the year 2015 and will subsequently display a gradual recovery throughout our forecast period.

A similar story has played out in Chevron’s downstream operations as well and Trefis estimates that the company’s Average Refined Products Selling Price has dropped more than 30% in 1H-2015 as compared to the year ago period. ^[1] We believe that this figure will remain just below $80 for 2015 before staging a recovery in later years. As a result of this rapid decline in realizations in both upstream and downstream sectors, we believe that Chevron’ total revenue for the year 2015 will decline 36% and amount to $166 billion. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

Increased Focus On Controlling Capex Amid Lower Oil Prices

Controlling capital expenditures while maintaining modest growth prospects, is the highest priority for Chevron right now, primarily due to the changed crude oil price environment. In the past few years, the company’s total net capital expenditures have soared from around $19.7 billion in 2009 to almost $34.6 billion in 2014. ^[1] Most of the incremental capital expenditures have gone into the development of deepwater hydrocarbon reserves and the construction of giant liquefied natural gas (LNG) plants in Australia, where cost structures have elevated significantly over the past few years due to rising labor costs. The gross cost estimate for the Gorgon LNG project has risen by more than 45% since 2009, and stands at $54 billion today. ^[2]

However, in view of the changed crude oil price environment, Chevron is taking measured steps to significantly reduce the level of its absolute capital expenditures. The company plans to reduce its total gross annual capital expenditures by around $10 billion by 2017. ^[3] Chevron also increased its divestment target by 50% to $15 billion by 2017. ^[4] Therefore, we expect the company’s net upstream capital expenditures will decline by around 24.5% from $30.1 billion in 2014 to $22.7 billion in 2017. Beyond 2017, we expect the company’s adjusted upstream EBITDA growth to outpace its net investments in the upstream business, leading to a gradual decline in its Net Upstream CapEx as a percent of Upstream EBITDA.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. Chevron’s SEC Filings [↩] [↩] [↩]
2. More delays for Chevron’s $74bn Gorgon project, August 3, 2015, The Australian [↩]
3. Chevron to sell $15 billion of assets, cut spending amid price slump, March 10, 2015, Fuel Fix [↩]
4. Chevron Accelerating Asset Sales to $15 Billion on Oil Slide, March 10, 2015, Bloomberg [↩]