The world’s insatiable appetite for energy shows no signs of slowing down. From the rise of artificial intelligence, with its voracious demand for electricity, to the explosive growth of data centres, the need for power is skyrocketing. While the promise of nuclear energy looms on the horizon, the reality today is that oil and natural gas remain the cornerstones of our global energy infrastructure. This presents a unique opportunity for discerning investors, and Chevron could be a hidden gem in this dynamic landscape.
Chevron ($CVX): A Global Energy Powerhouse
Chevron is not just another oil company. It’s a vertically integrated energy behemoth, spanning the entire energy value chain. From exploring for and producing oil and natural gas to refining, marketing, and distributing energy products worldwide, Chevron has a commanding presence in the global energy market.
But Chevron is more than just a traditional energy company. It’s actively embracing the future, investing in cutting-edge technologies like carbon capture and storage, and exploring avenues for sustainable energy solutions. With operations spanning the globe, Chevron is well-positioned to navigate the complexities of the modern energy landscape and capitalize on emerging opportunities.
Why Chevron ($CVX) Could Be Undervalued
Our analysis suggests that Chevron’s current stock price may not fully reflect its true value. Several factors contribute to this potential undervaluation:
- Growth on the Horizon: Chevron is poised for significant growth. Increased production in key areas like the Permian Basin, coupled with the successful integration of recent acquisitions, such as the strategic acquisition of Hess, is expected to drive substantial revenue growth.
- Efficiency Drives: Chevron is relentlessly focused on optimizing its operations and driving down costs. By leveraging technological advancements and streamlining processes, the company is enhancing its profitability and creating value for shareholders.
- A Dividend Dynamo: Chevron has a long and impressive history of rewarding shareholders with a generous dividend. The company’s current dividend yield is compelling 4.5% (US inflation 2024: 2.6%), providing a solid foundation of income for investors seeking a reliable stream of cash flow. Dividends increased on average over 6% in the past 5 years.
- Energy demand: Energy demand in the US is expected to double and the EU must find cost-effective alternative sources of energy after Russian gas stopped flowing through the Ukraine to EU on expiry of the deal.
Takeaway from Analysis
There is a potential upside of 36% from the current stock price when comparing to the fair price based on the discounted cash flow (DCF) assuming a 2% growth rate, margin increases and WACC of 8%. The average stock forecast is USD179 which has an upside of 17%.
The valuation is derived from a five-year forecast of projected free cash flows, with an assumed perpetual growth rate of 2%. An 8% WACC (Weighted Average Cost of Capital) is applied to discount the future cash flows to their present value (DCF). The company’s debt is then subtracted from this value to arrive at the net value. Finally, the net value is divided by the total number of shares outstanding to determine a fair value per share of $208.11, posing a significant upside to the current market price of $153.14.
The energy industry is currently navigating a period of moderate crude oil and natural gas prices alongside significant cost inflation. Chevron is well-positioned to capitalize on the anticipated increase in energy prices over the next decade.
Navigating the Energy Cycle
The energy sector is inherently cyclical. Prices fluctuate, supply and demand dynamics shift, and companies must adapt to survive and thrive. Chevron, with its integrated business model, strong financial position, and experienced leadership, is well-equipped to navigate these cyclical challenges.
Below is Chevron’s revenue over a period of 10 years with the cycles typical to the industry.
Data source: macrotrends.net
A Look at the Competition
Compared to its major competitors, Chevron’s valuation appears attractive. Its price-to-book ratio is relatively low, suggesting a margin of safety for investors. This indicates that Chevron’s assets may be undervalued relative to its peers.
| Company | Market Cap [in $ Millions] | PB | PE |
|---|---|---|---|
| Saudi Aramco (2222.SR) | 1 808.000 | 4.01 | 13.62 |
| ExxonMobil Corporation (XOM) | 471.638 | 1.72 | 12.48 |
| Chevron (CVX) | 263.651 | 1.65 | 12.82 |
| Royal Dutch Shell plc (Shell) | 194.170 | 1.00 | 7.43 |
| BP plc (BP) | 79.971 | 1.21 | 7.73 |
| TotalEnergies SE (TTE) | 130.068 | 1.07 | 7.87 |
| ConocoPhillips (COP) | 115.183 | 2.59 | 12.02 |
| Equinor ASA (EQNR) | 68.619 | 1.56 | 7.61 |
| Eni S.p.A (E) | 46.470 | 0.83 | 6.99 |
| Average | 353.086 | 1.74 | 9.84 |
| Chevron | 263.651 | 1.65 | 12.82 |
Leadership and Vision
Under the leadership of CEO Mike Wirth, a seasoned industry veteran, Chevron is charting a course for sustainable growth and long-term success. Wirth’s emphasis on operational excellence, technological innovation, and shareholder value creation inspires confidence in the company’s future trajectory.
Risks to Consider
While Chevron presents a compelling investment opportunity, it’s crucial to acknowledge the inherent risks associated with the energy sector:
- Acquisition-Related Uncertainties: The ongoing arbitration related to the Hess acquisition could create headwinds and impact the company’s financial performance.
- Execution Risks: Bringing major projects online can be complex and challenging, and unforeseen delays or technical difficulties could impact cash flow and profitability.
- Market Volatility: Fluctuations in oil and gas prices, driven by geopolitical events, economic conditions, and changing demand patterns, can significantly impact the company’s revenue and earnings.
- Regulatory Headwinds: Increasing environmental regulations and potential legislative changes could impact operational costs, restrict production, and increase the company’s compliance burden.
The Bottom Line
Despite the challenges and uncertainties inherent in the energy sector, Chevron presents a compelling investment case. Its strong fundamentals, robust growth prospects, and attractive dividend yield make it a potential sleeping giant in the energy sector.