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Never Underestimate The Power Of Big Oil

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I became a shareholder of Chevron CVX +0.28% Corp (NYSE:CVX) when it acquired the former Texaco, which I believe was the first stock I ever bought. I was fresh out of business school and made an investment in Texaco’s dividend reinvestment plan, and I’m happy to report that I literally make more in dividends every year than my original investment. I expect to pass the whole thing on to my kids, hopefully many years from now with the account at a much higher level.

That return is thanks to super majors being literally built for anything. Chevron has obviously done better with oil over $150 but it’s also held up at $10 a barrel. In fact, I just went back through 40 years of dividend history and this company has never once cut its payout. And looking back at my initial DRIP statements, my per share quarterly dividend is nearly 10 times more than it was when I bought in.

There have obviously been other energy stocks that have outperformed Chevron over the years. And the same goes for the other super majors. But nothing in the energy space has come close to the steadiness of these stocks.

The big question I always ask about the super majors like Chevron is whether something has changed in the sector environment to threaten that staying power. And the past several years have posed a pretty severe challenge to management teams. That started with the aggressive investment plans we saw Chevron and others embark on early in this decade to develop long-life oil and gas projects.

Initially the super majors’ plans included everything from the pre-salt off the coast of Brazil to Alberta oil sands and giant Australian liquefied natural gas export projects like Gorgon and Wheatstone. For the most part, the development has been well executed. But companies still had to cope with the impact on capital markets from falling oil and gas prices, and quite a bit of second-guessing from the analyst community on the prudence of investing in long-life projects. Now that many of these projects have come on stream and energy prices have rebounded, you don’t hear a lot of that anymore


The other thing that impresses me about how Chevron handled the downturn is that it successfully shifted tactics, without sacrificing the goals of its strategy. What I mean by that is management didn’t reach its goals by following through on every project it announced in 2012. Rather, it recognized what was working and shifted resources there.

One of its biggest success stories is in the Permian Basin of west Texas, a region management hardly mentioned at the beginning of the decade. Now it’s a primary source of the company’s production growth along with the Gorgon and Wheatstone LNG projects. Being able to shift to fresh horses in the middle of a heavy development phase is a strength that’s pretty much unique to the super majors.

Another point that helps the majors is that they’re usually diversified beyond exploration and production (E&P) for oil and gas into other businesses like refining, chemicals and midstream (pipelines and terminals). These businesses can act as an automatic stabilizer for the majors in periods of low commodity prices.

Let’s take Chevron for example. The company divides its business into several segments including Upstream (E&P), Downstream (Refining) and Chemicals. In 2013, when oil prices were still up over $100/bbl, the upstream business accounted for nearly 80% of Chevron’s net income with downstream and chemicals each chipping in around 10%.

However, when oil prices collapsed in 2016, upstream generated barely 2% of the company’s total net income while downstream was around 47% and refining over 50%. Refining and chemicals businesses became more profitable as oil, natural gas and natural gas liquids prices fell and helped offset a massive collapse in upstream earnings.

I’m not saying that refining and chemicals can offset all the declines in profits due to falling oil and gas prices, but it’s a meaningful “ballast” for a company like Chevron.

If I had to pick just one super major right now it would be Chevron. True, the company is exposed to Indonesia, where the government is apparently considering nationalizing foreign investors’ energy assets in advance of April 2019 elections. Whatever it might lose there, however, the company figures to make up manifold in places like the Gulf of Mexico, the Permian Basin and Australia, where the Wheatstone LNG facility became fully operational this year.

Chevron has won a potentially valuable contract with Iraq’s Basra Oil to develop fields in the southern part of the country, a long-time Holy Grail for super majors. And it’s already a big player in Argentina’s Patagonian shale, which has been called by some “the next Permian Basin.” Those are part of some $79.5 billion of active development projects cited by Industrial Info Resources.

Meanwhile, the company is on track to generate $17.5 billion in free cash flow for 2018 after $13.5 billion in CAPEX. That’s enough to cover cash dividends paid by more than a 2-to-1 margin, leaving nearly $9 billion for debt reduction, stock buybacks, acquisitions and other uses. It’s a great position to be in and the stock is also not expensive at 13.7 times expected 2018 earnings. Chevron is a strong buy even for conservative investors up to $125.


11 Comments on "Never Underestimate The Power Of Big Oil"

  1. Roger on Tue, 2nd Oct 2018 7:45 pm 

    Nice investment…well done!!!

    Bring on the clowns touting green investing…

  2. Sissyfuss on Tue, 2nd Oct 2018 8:35 pm 

    Forbes cares.

  3. makati1 on Tue, 2nd Oct 2018 8:42 pm 

    Sucker bait! LOL

  4. print baby print on Wed, 3rd Oct 2018 1:00 am 

    No the guy is fine . He looks his own ass and he doesn’t care about anything else. That is the way the humans function , that’s way we are doomed

  5. Cloggie on Wed, 3rd Oct 2018 2:02 am 

    Yet there are still those who worry about oil running out, where in reality they should worry about oil NOT running out.

  6. Dredd on Wed, 3rd Oct 2018 8:59 am 

    Tru dat.

    They can kill us all, including themselves (The Authoritarianism of Climate Change).

  7. print baby print on Wed, 3rd Oct 2018 10:08 am 

    Yes clogg oil is an inexhaustible fossil fuel i got it

  8. rockman on Wed, 3rd Oct 2018 12:07 pm 

    baby It will never be about “running out of oil”. It will be about who downs and controls what oil is left to produce. Just as it has always been and always will be. When global PO eventually hits and at some point, let’s say when only 70% of the previous max production is available, think of the power those companies/countries that control that oil will have.

    Chevron does not care at all about how much oil the petroleum industry can produce. It’s focus is only its own production level. It will gleefully acquire the remaining assets of any damaged company. Just as every Big Oil has done for more then 100 years. Are you old enough to remember when there were once Seven Sisters? Not that many today and there will be fewer in the future.

    We gladly eat our own. LOL.

  9. print baby print on Wed, 3rd Oct 2018 1:04 pm 

    I am 50 y old I heard for seven sisters . It is about control yes but when you have something to control. You and me disagree about the question of running out of oil. I claim that we are already run out of oil to sustain this way of life ( and now they make fantasy about peak demand) , and you postponed the peak . The oil is not a commodity which can be left out so easily or be controlled so easy it is a bloodline of the human civilization

  10. Dredd on Wed, 3rd Oct 2018 1:31 pm 

    Yes rockman,

    Drug dealers will be drug dealers.

    They are the mother of all despotic minorities (How To Identify The Despotic Minority – 3).

  11. Anonymous on Wed, 3rd Oct 2018 5:08 pm 

    Rockman: That’s not just oil but any industry. Companies come and go. And it’s not just some of them dying. There are other companies that can grow. For example EOG is now over a half million bopd.

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