Penn Wealth Publishing

2018.11.04 Penn Wealth Report Vol 6 Issue 04

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10 PeNN Wealth RepoRt volume 6 issue 04 04 Nov 2018 Penn Wealth RePoRt Copyright 2018. All Rights Reserved. iNvestmeNt intelligenCe Chevron Corp Integrated Oil & Gas The content of this report reflects the per- sonal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscrib- ers. This is not a solicitation to buy. Always consult your investment professional before investing any money. T he energy sector can be broadly split into three distinct business models: upstream, midstream, and downstream. While some companies explore for and extract the products (upstream), others handle and transport various forms of energy (midstream). Refiners turn the particular commodity into useful substances and retail outlets or distri- bution companies get the product to its final destination—be it a factory or your vehicle (downstream). While there are very well-run companies in each of these distinctive areas, there is one particular energy firm which we believe excels in all three: Chevron Corp (CVX $108-$115-$134). Chevron can trace its roots back to the Pacific Coast Oil Company, which was founded by a group of explorers and merchants in San Francisco back in 1879—about thirty years after the California Gold Rush attracted hordes of speculators to the region. It was that year— 1879—that the company acquired Pico No. 4, the first successful oil well in California. Over the ensuing 139 years, the entities which ultimately morphed into Chevron (the company dropped its ChevronTexaco name in 2005) have helped create a $227 billion integrated energy powerhouse, with global operations in the fields of production, transpor- tation, refinement, and retail sales. Chevron now produces 1.7 million barrels of oil and 6.0 billion cubic feet of natural gas each day. The company sells 2.7 million barrels of refinery products each day. Those are astound- ing numbers. Chevron also has a 50% stake in ChevronPhillips Chemical Company. Management & Strategy Chevron changed leadership in February of this year, with Mike Wirth taking the helm from former CEO John Watson. Wirth has been with the company since 1982, and has extensive experience leading both the midstream and downstream divisions. To be sure, the higher the price of oil and gas, the more companies within the sector can earn. That being said, Chevron has income streams up and down the ecosystem. The company has exploration and production operations going on around the world, in areas from heavy oil to LNG to shale. For example, CVX controls 423,000 net acres in the rich Marcellus Shale area, and 1.7 million net acres in the Permian region below Texas and New Mexico. In the midstream category, the Chevron Pipe Line Company—a wholly owned subsidy of CVX—operates a network of 3,000 miles of pipeline, transporting over 1.2 million barrels of crude, refined products, and chemicals daily. Downstream, the company has a network of nearly 8,000 Chevron and Texaco service sta- tions across the country. Financial Strength & Valuation Chevron has a very manageable debt/ equity ratio of 25%, compared to 48% for ConocoPhillips and 60% for BP. The company's 18 p/e ratio is also lower than its integrated oil peers. Chevron had sales of $147 billion over the TTM, and earned $12 billion over that time- frame—or $6.39 per share. The company spreads that wealth around, spewing out a gen- erous 3.82% dividend yield to investors. With a Relative Strength Index of 30 and a price per share below its 50- and 200-day mov- ing average, we believe CVX is undervalued. While we purchased shares of Chevron within the Penn Global Leaders Club at $101.59 per share, we would still be a buyer at the current price. Chevron is simply a great American com- pany selling at a discount. Certainly, oil prices could continue dropping from October, but Chevron is squarely in a buy range. If we could own but one energy company, it would be Chevron. It we could own only ten companies, one would be Chevron. Chevron is one of those rare energy companies which operates masterfully in all three segments of the sector: upstream, mid- stream, and downstream.

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