Chevron’s Marketing & Transportation Units Add Little Zip to Stock
Chevron (NYSE:CVX) has extensive operations in marketing and trading crude oil as well as transporting oil & other fuels. But how really significant are these businesses in terms of value? As far as revenues go, it’s definitely substantial but the business value is negligible because of the rock bottom margins on this business. Below we explore these operations and our estimates. Chevron competes with other oil & gas companies like Exxon Mobil (NYSE:XOM), ConocoPhillips (NYSE:COP), BP (NYSE:BP) and Anadarko (NYSE:APC).
Our price estimate for Chevron’s stock currently stands at $104, which is inline with the market price.
Marketing & Transportation at a Glance
These business operations include the marketing of crude oil and transportation of crude oil, natural gas, chemicals and petroleum products as well as the trading activities related to crude oil, natural gas liquids and refined products. We note that these trading activities are different from Chevron’s trading activities under its upstream segment.
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Value Contribution
Although marketing & transportation operations generate significant revenues for Chevron, the value contribution is limited to around 4% of Chevron’s stock by our analysis. This is primarily a result of extremely low profit margins (EBITDA margins) for Chevron’s downstream business, which includes its refining business in addition to the above-mentioned operations. The margins for this segment stood at just over 2% in 2010.
Positive Outlook
We expect the revenues to continue to grow but remain range-bound as a proportion of total revenues, as evident from the historical data. This percentage is somewhere around 24% to 27% according to our estimates. What helps the growth is the encouraging outlook for oil prices as well as Chevron’s strength in transportation network.
The revenues from these operations are highly related to crude oil prices. As a result, the revenues have shown a trend similar to crude oil market prices, with a sharp dip observed in 2009. However, we expect crude oil prices to rise in the future driven by increasing energy demand from developing countries and growth in per capita incomes.
Although the revenues will grow, the question remains does it really matter?
We do not see any groundbreaking improvements in profit margins for the downstream business and therefore continue to expect these operations will be a low value generating business for Chevron.