Chevron Corporation (CVX)

Energy and Natural Resources Coverage Group

Company Overview

• Upstream: exploring and developing oil and gas– Benefits from high oil

prices– Revenue decrease of

18% in 2014• Downstream: refining

and purifying crude resources– Benefits from low oil

prices– Revenue increase of

93.4% in 2014

Ticker CVX

Price $106.68

Market Cap $200.58B

Dividend $4.28

P/E 10.52

EPS $10.14

Management

• John S. Watson - CEO (2010-present)– 30+ years of experience with the

company – Variety of managerial roles

• George L. Kirkland (2010-present)– 40+ years at Chevron– Engineer turned management– Head of upstream - most important

division • Pierre R. Breber (2014-present)

– 25+ years as engineer and midstream exec

• Overall: seasoned team with relevant industry experience from both corporate and engineering perspectives

Sector Performance

Thesis Summary• The market has overestimated the damage of the fall

in oil prices on global energy players• Chevron is in the best position amongst these

companies to take advantage of depressed energy prices and subsequent recovery– Has achieved relatives success in vertical

integration (especially transportation services) compared to its competitors

– Effective access to cash allows for expansion of oil projects as firms such as BP are forced to consolidate

– Multiple new projects to be brought online, such as the largest enhanced oil recovery project, and extensive technology development

Oil Price Prediction

• Price factors– Lagging demand: slow

global growth – China, Japan, Europe

– Will they recover?– Increased supply: shale

etc.– Price elasticity of

supply?• Uncertain outlook• Futures ~50% volatility with

95% C.I. low price $30 and high end $90

• Supply disruptions in major geopolitical players?– Iran, Venezuela, Russia

Rebounding Oil Prices

• Companies within OPEC such as Nigeria (whose oil minister is the president of OPEC) incredibly concerned with depressed prices and are currently in talks to organize future action– Numerous countries such as Venezuela

and Russia need higher oil prices to sustain their budgets

• Domestic producers (especially shale) are maintaining or cutting production, which will lead to less supply and higher prices

Vertical Integration Advantage

• Shell and BP have been investigated for anti-trust issues in Europe

• Best hedged against ramifications of energy trade war with China (there are likely Congressional tariffs on business with Chinese subsidiary companies) due to other companies not having majority control of their Chinese subsidiaries

Cash Advantage

• Chevron assumed leadership and partial ownership of multibillion dollar projects in Gila, Tiber, and the Gulf of Mexico from BP in January

• Chevron has been increasing investments in the deepest areas of the Gulf of Mexico as other companies have continued to cut investment as well as began pumping from sources that have not been used in over a decade

• Chevron was able to raise $6 billion with bonds to help push through the volatility in oil prices

• Suspension of buy-back program will increase available capital for investment

Project and Technology Advantage

• Manages the world’s largest hyper-efficient, enhanced oil recovery extraction project– Led to sell off when announced, but critical in in growing

market share once oil markets normalize• Had one of its best exploration years, with important

discoveries in the deepwater Gulf of Mexico, Australia, West Africa and the Permian Basin

• Recently brought a new deep-water oil platform online– Expected to produce 94,000 barrels per day of oil/21

million cubic feet of natural gas.• Can generate that 10% breakeven even at oil prices as low as

$30 per barrel, and production is forecasted to increase 20% from 2013 industry benchmarks by 2017

• Chevron Technology Ventures is over a decade old and currently has invested over $200 million in start ups and other emerging technologies

Thesis Summary• The market has overestimated the damage of the fall

in oil prices on global energy players• Chevron is in the best position amongst these

companies to take advantage of depressed energy prices and subsequent recovery– Has achieved relatives success in vertical

integration (especially transportation services) compared to its competitors

– Effective access to cash allows for expansion of oil projects as firms such as BP are forced to consolidate

– Multiple new projects to be brought online, such as the largest hyper-efficient oil extraction project, and extensive technology development

Comps Model

Company Ticker

Price Market Cap

P/E P/B Dividend Yield

EV/EBITDA

Chevron CVX $106.68 $200.58B

10.52 1.3 4.00% 5.90

ExxonMobil

XOM $88.54 $371.40B

11.66 2.14 3.10% 7.06

Shell RDS $65.37 $205.75B

13.87 1.19 4.70% 5.18

BP BP $41.44 $125.70B

33.86 1.13 5.80% 5.28

ConocoPhillips

COP $64.40 $79.31B 11.69 1.55 4.50% 5.00

More ComparativesCompany Ticker Cash Debt Debt/Equity Exploration

Failure Rate(Last reported year)

Chevron CVX $13.22B $27.82B 17.81 30%

ExxonMobil XOM $4.62B $29.12B 16.08 39%

Shell RDS $21.61B $45.54B 26.36 N/A

BP BP $30.09B $52.85B 46.92 53%

ConocoPhillips COP $5.06B $22.56B 43.17 N/A

Risk Factors• Tied to the uncertain

oil market• Downside risk

– Dip into cash reserve?

– Dividend impact?– Future exploration

projects affected by lower per barrel prices

• Ceiling for the foreseeable future?– CVX vs market

expectations

Why aren’t we worried about Chevron?

• Well-positioned for decline in oil prices– No real risk of

dividend decline– Ramifications of

decline for smaller producers

– Cash on hand• Not a short-term

play– Dividend in the

interim

Downstream Hedge• In the downstream, CVX completed important

investments at U.S. refineries, which contributed to improved financial and operational performance.

1. New premium lubricants base oil facility in Mississippi.

2. Expansion of additives plants in Singapore and France.

3. Chevron Phillips Chemical Company LLC, achieved start-up of the world’s largest on-purpose 1-hexene plant and progressed construction of its new ethane cracker and polyethylene units in Texas.

Earnings

Upstream90%

Downstream10%

2013

Up-stream80%

Downstream20%

2014

Discounted Cash Flow

Targets

• Target price: oil breaks $70/barrel, stock price around $122

• Exit if: oil drops below $35/barrel• Timeline: 2-2.5 years