Intelligent investors are those who analyze the intrinsic value as well as the risks associated with the investment. This requires a method of analysis that provides investors with the opportunity to make wise investments (Stewart 12). The current valuation reviews the historic accomplishments of the company to determine its value. Chevron Corporation (CVX) is chosen for this stock analysis because it offers a compelling dividend yield and significant growth from previous valuations. Additionally, Chevron’s valuation is cheaper when compared to other oil stocks in the NYSE (Chevron Corp. CVX n.d.). The company has fatter dividend yields, which may allow investors to purchase stock at 4% a yield. The company also has a higher yield that has grown its payout. According to the company’s annual reports, the company is able to sustain its fast dividend growth (Chevron Corporation 2014 Annual Report n.d.). Chevron is operating a profitable upstream business amongst the major oil companies. The growth projects of Chevron allow the company to maintain high production levels over the next few years. According to Chevron Corp. CVX (n.d.), Chevron is experiencing high profits, with its upstream profits rising sequentially by eight percent. The unit profitability of the company makes the company more profitable as compared to major stocks such as ConocoPhillips, Hess, or Exxon. Chevron has grown into a profitable company with better returns that is more heavily weighted towards oil (Chevron Corp. CVX n.d.). Chevron’s reserves are geographically balanced and managed, meaning that it can deliver the profits. The company commits considerable capital to development projects. To understand whether an investor may make a buy in on the company stock, the current paper examines the total economic analysis, industry analysis, and company analysis, before valuating the stock and making necessary recommendations.
Total Economic Analysis
Economic forecasts of Chevron
Johnston and Johnston (24), assert that the fair value estimate of the company has increased. The long-term oil price outlook for Chevron is bright as barrel estimates change, following the materialization of tight oil in the United States. Forecasts show that quick supply responses are possible in the long term while in the short term; slow responses may have less impact on the resource potential of the company (Chevron Corporation 2014 Annual Report n.d.). Projections show that short-term declines in output are short-lived, allowing the company to reverse its output with producer’s response to price signals. Analysts predict a future of reduced project costs as replacing resources becomes difficult. Most Chevron projects will most likely remain difficult, as the project sits at the higher ends of the cost curve. The unconventional portfolios of Chevron lead other peers in margins and return on capital (Chevron Corporation 2014 Annual Report n.d.). The economic analysis reveals that production from regions such as the Gulf of Mexico and West Australia form the bedrock for the company’s growth over the next years. The reserves will preserve the price exposure of Chevron’s oil, thereby solidifying the position of the company among its peers. The increased spending, alongside lower spending will result in higher returns.
In contrast, the free cash flow of the short term may be severe as capital spending becomes more inflexible. The reduction in midcycle oil prices affects the company’s valuations and returns, since the company majorly relies on producing oil (International Labor Organization n.d.). Additionally, the company increases investments opportunities in high cost projects with the past years. The company expects to be inflexible in the near future while spending is expected to decrease as the company cuts on spending (International Labor Organization n.d.). The management intends to ensure dividend by trimming its capital spending plans. Short-term costs also show that the costs of international projects will contract by 10% to create opportunities for reducing further spending.
The Gorgon and Wheatson gas projects that the company initiated in Australia are the short-term drivers of the company’s growth. The projects, which were slated for 2015 and 2016, will increase the equivalent oil production in the company per day (International Labor Organization n.d.). Investing in liquefied natural gas (LNG) production will require additional expenditure, but will create capital to support reinvestments. Chevron has spent more per barrel, despite the competing LNG projects. Although the company may only engage in moderate spending over the short term, forecasts show that the trends will remain moderate as the company continues investing in growth. Over the next years, returns will fall as investment remains elevated (International Labor Organization n.d.). The lower prices and higher earnings will initiate greater production, thereby leading to increased downstream earnings. The free cash flow will reduce as compared to the period before 2013 where the steady rise in oil price enhanced cash flow. Earnings suffered during the period as prices remained low and capital spending remained high. The analysts further predict that the increasing steady cash flow resulting from the growing population as well as reduced spending give Chevron the opportunity to be cash neutral after receiving 2017 dividends.
Upstream, Chevron will benefit from the deep-water explorations in its core areas. This experience will increase the attractiveness of Chevron to foreign governments (Marek 13). Where governments are making bids for production sharing opportunities, Chevron will be the most preferred company, thereby adding its value as it ventures more into deep-water explorations. Many of Chevron’s rivals do not qualify to operate in deep water explorations, meaning that it is a competitive advantage. The company also leverages sour gas processing with oil recovery, which defines its operation in the Middle East (Marek 13). Chevron is building capital-intensive LNG infrastructure meant to increase its exploration size and strength. The infrastructure may take years to develop, but the company will maintain spending in commodity price cycles required to handle the projects. The strength of the company is evident in the Gorgon LNG project. The company continues advancing despite the price volatility over the past years (Marek 13). Chevron moved in quickly, to secure resources for the project before its rivals, making the company more leveraged to benefit from the stable OPEC prices.
Relationship of Economic Forecasts to the Task of Security Analysis
The profits of Chevron tie to oil and gas production, meaning that they suffer losses when prices fall significantly. Moreover, the depreciation in the price of the products over time exposes the company to several investment risks (Morgan 7). First, the company is prone to overinvestment risks, which may affect its returns in the short and long-term. The returns of the company may languish as the economy becomes weaker. Cost overruns will affect the company’s projects without considering commodity prices in these subjects. Most of the company investments exist in politically challenging areas with a lot of hostility towards outside firms (Morgan 7). Exposing itself significantly to the gulf coast would mean that permitting could delay, thereby creating high costs, and delaying production.
To achieve success in its regions of operation, Chevron has to monitor the political stability, socio-economic securities, and terrorism development in its area of operations (Morgan 7). Significant political shifts have a bearing on Chevron’s security environment. Identifying the implications of these events and trends within the next few years will create stable forecasts over the next few years. Studying economic factors helps illuminate on the security environment by focusing on the trends and deviation in the existing activity in its major investment areas.
Economic Factors of Possible Importance in Security Analysis
The economic factors that largely define the operations of the oil company include the economic activity and business cycles, government policies, cyclical indicators, and growth in GDP.
Economic Activity and the Business Cycle
Money Supply Movements
The movement of commodity prices has a relative effect on commodity prices, implying that they affect global economic activity. In the global mining business cycle, the increasing demand for commodities has a similar increased effect on the price of all commodities (Morgan 7). The money supply movements relating to the forces of demand and supply may not create a similar comovement in the price of commodities. The resurgence in commodity prices in the oil industry suggests that the company may continue making significant profits within the next few years.
Changes in Interest Rates and Inflation
Over the next few years, the production costs will rise, thereby increasing capital expenditure required to cover the costs (Morgan 7). The increased costs will raise the aggregate price level of the economy. The money supply may effectively contract and expand depending on the economic policies of each country. If the supply of real money is insufficient, the supply adjustments made according to the price levels will decrease. Interest rates will go up and investments will be costly. The resulting multiplier effect will mean that the output is stagnated and no output arises.
Oil price
In the dry American Midwest, the striking South American workers are factors that may lead to the flux in commodity prices. A major decider of the fluctuations is the geopolitical instability associated with the Middle East. Morgan (7) states that the changes in commodity prices will have significant macro-economic effects on the country. Analysts state that the shocks in commodity prices, as witnessed in 1970 were significant to the global business cycle. The recent Great Recessions is evidence that the shocks affect the global business cycles
Government Fiscal Policies
Fiscal policy refers to using government spending or taxation to spur economic growth. Fiscal policy promotes employment and price stability within the environment of operation. The fiscal operations of Chevron are within the medium expenditure framework (Marek 8). The company focused on maintaining cautious fiscal management with the development attributed to increasing crude oil prices that crashed during the global crisis thereby inducing low demand for energy. The company humbled its spending policies and chose to spend more on defense such as cyber security.
Business Cycle and Cyclical Indicators
Being in the cyclical energy industry, Chevron remains sensitive to business cycles. Weather and seasons have an impact on the company since a demand for oil in the summer, may not rival the demand for oil in winter (Marek 8). Fewer oil purchases also mean that less storage and transportation take place, meaning that the rate of mining also reduces. The only exception is the company’s natural gas, which increases in demand during colder months. The cyclicality of the industry means that the earnings of the company still face volatility.
Growth in GDP
The supply of oil and its prices is critical to the economy. An increase in price has a relative effect of dampening growth. On January 2015, Chevron recorded the lowest quarterly profit within a five-year period (Chevron Corp. CVX n.d.). The company argued that it would trim its spending plans as the collapsed oil prices affected cash flow. Within three months, the oil company recorded a profit of 3.5 billion, which were the lowest ever since the recessions. The company further cut its spending on oil and gas by 13% to respond to the slumping oil prices in the region.
Limitations of Economic Forecasting, as Related to Security Analysis
A limitation of economic forecasting for the company is the mixed interpretations associated with the operations of Chevron that decomposes commodity prices. The mixed interpretations make it hard for analysts to ascertain the money supply movement to and from the industry (Stewart 14). Next, the multiplier effect will mean that the output of Chevron is stagnated and output minimized, thereby affecting interest rates and inflation. Although accurate sales forecasts contribute valuably to businesses, the data often suffers in accuracy. A business is able to introduce different scenarios for the interpreted data. This makes relying on a single forecasting method hard, as an organization may need other tools of analysis to give the best reduction for the industry’s future (Stewart 14). A bad forecast is detrimental to the organization, meaning that companies should not base their decisions on forecasts alone. Additionally, Chevron remains sensitive to cyclic shocks within the oil industry, which is expected as the average growth rate of the company increases. This makes forecasting on the prospects of oil complicated.
Industry Analysis
Determination of the industry on which the firm operates
Chevron Corporation is among the largest oil companies in the United States. Chevron’s success is attributable to its focus on robust economic management including solid supply chain that has given its management a competitive advantage over other companies in the oil production and retail industry. Chevron’s logistics structure is among the impetus that has influenced its supply chain positively. While most observers note that numerous strategies aimed at strengthening the Chevron’s company supply chain have not been expressly successful, there is room to believe the company is doing all within its capacity to promote its intrinsic value within the common stock (Pinto, Henry, Robinson, & Stowe 25). Currently, regional governmental initiatives and programs continue to push for sustainable environmental practices that do not derail the quality of the biodiversity to pathetic levels. These efforts seek to develop the economies and secure the much-needed foreign exchange. As the Amazon region continues to integrate in the global economy, efforts to protect the region continue to beckon emphasis to sustain the economic demands. In an attempt to promote global sustainability, Chevron continues to undertake strategies aimed at integrating environmental concerns into trade policies.
By type of product (s) produced
Chevron’s is a committed company in the energy industry that explores and produces crude oil. Chevron deals in and produces gasoline and refineries, natural gas, chemicals, mining, and power generation. The company’s production cycle is enormous and it includes several oil producing counties in North Africa, Asia, and the United States.
Business Cycle Classification
Currently, the company trades at $ 120.30 with very lucrative market valuations. According to Chevron Corp (1), the company has sound profitability ratios and viewing the company’s operations over the last six months, its market grid is exponentially impressive (Pinto, Henry, Robinson, & Stowe 26). Chevron’s stock currently is on an upward matrix of 11.05% stability over the last three months
Growth Industry
With a profit margin of 9.70%, Chevron has grown outstandingly by turn revenue sources into direct profit. In much of the analysis conducted by Reuters Estimates, the consensus rating for Chevron Corporations hold a lucrative positioning (Chevron Corp 1). While its rating changed sometime in late 2014 after having undergone relegation from a buy, the company is on a rapid forward mobility scale. While the net income declined by 9% during the just-concludedfiscal quarter, this fall was negligible as the quarter reported the robust economic results never witnessed by any company in the oil industry.
Cyclical Industry
The company’s exploration area is immense with an outreach spanning a global outlook. Chevron Corp (2) affirms that the company’s global refinery structure processes nearly three million barrels of crude oil on a daily basis. Moreover, Chevron’s system anchors on a robust refinery structure based on the company’s core prospecting areas including United Kingdom, Singapore, South Korea, Thailand, and California. In addition, the company’s mass production and oil refinery base has succeeded because of the company’s input to expanding its broad divestiture. The company markets its products under several gas outlets such as Chevron, Texaco, Caltex, and Total in over 180 countries currently (Pinto, Henry, Robinson, & Stowe 21).
Defensive Industry
Chevron faces potential lawsuits for the impact of its practices such as mining on the environment. In an attempt to expand its supply chain, Chevron Corporation has subscribed to these three major objectives — to deal in exclusively renewable energy, a zero tolerance strategy on industrial waste and to deal in goods that do not conflict with the company’s principles while giving environmental friendly habits a big edge.
Cyclical-Growth Industry
Cost cutting has characterized the company operations of late. While the oil prices may not rebound soon, the international energy demand remains relatively weak. For Chevron, the inventory is high, and it does not appear shaken, however.
Specific Elements of Industry Analysis may include
Past Sales and Earnings Performance
Chevron provides robust administrative, financial, management as well as technical support services in America and its subsidiaries, which fully engages in integrated oil and energy operations around the globe. All these operations combined put Chevron to be the fourth-largest oil company in the world.
Regulation of Industry
The basis of any business is its ability to align itself with public policy regulations and societal concern for the quality of service delivery (Stewart 23). The US authority’s commitment to reduce the prevalent risks of industrial production continues to shape operations within the company. Chevron being receptive to these regulations is normally in cordial relationship with the American authorities.
Government Attitude toward the Industry
The government attitude towards Chevron is very cordial since the company is committed to humane industrial production practices (Pinto, Henry, Robinson, & Stowe 28). Environmental concerns continue to be a big challenge to policy makers in the oil industry prompting the institutions to introduce even stricter penalties. The effects on environment particularly continue to push the authorities in America to consider introducing heavy measures to strengthen taxation.
Permanence of Industry
The company’s logistics system focuses on visibility through enhanced information sharing within the management structure and between Chevron and their suppliers. While numerous logistical functions have been accredited for its market visibility, the focus has always been put on its recently adopted green supply strategy, which focuses on environmental conservation.
Technological Advancement
Lately, advancements in information technology have made marketing to customers more efficient via cable networks and other local and international media outlets. These shifts have moderated the market situation and in most cases, the retailer has shifted its concentration from the traditional seller situation, giving the buyer a greater edge. The resultant product of this scenario is that more competition has been witnessed at the level of manufacturers with remarkably less product differentiation.
Labor Conditions
The ideological framework of industrial relations is all about the partnerships between employees and their employers. Industrial conflicts and disputes are inherent in all labor systems. These conflicts normally occur when the employees’ collective bargaining power resolves to industrial action culminating in events such as strikes (International Labor Organization 5).
Possibility of Strike or Unattractive Labor Settlement during the forecasting period
Chevron Corporation ensures that effective systems for the prevention of disputes and settlements of labor are in place. In practice, such gestures are responsible for the company’s sound labor relations policies. Moreover, within Chevron Corporation effective resolution of labor disputes usually aims at promoting the right to collective bargaining between employee and the management.
Competitive Conditions in the Industry
Competitive advantage for the company is second to nothing (Baldi 56). Chevron’s management terms its competitiveness as poignantly meaningless when the competitors against this zeal do not exist. Chevron therefore, finds it fit to stay conscious of this fact while attempting to offer the most formidable competitive approach in the global market.
Do Barriers to Entry Exist?
In situations where customer demands dominate the markets, the process of selling is becoming a critical factor for many companies (Simkins & Betty 16). Majority of the companies approached with this situation normally shift their market strategy to meet the changing demands of the market trends. Companies that supply customer packaged goods naturally pile pressure on suppliers without necessarily seeking productivity through new business innovations.
Product-Differentiation
Being a holding company, Chevron deals in petroleum products and energy operations. The company has invested in several operations in oil and gas products that increase its outreach and participation in the global market.
Absolute-Cost Advantage
With the increased customer focus, Chevron continues to intensify its competitive advantage to position itself to the ever-changing customer choices that have forced most companies to approach supply management very differently. Customers too in the oil supply chain have not shown willingness to retract their position and accommodate the pressure-tight selling techniques (Baldi 56). To deal with these market discrepancies, Chevron has strategically streamlined its purchasing agenda in ways that are expected to change its marketing scope for the better.
Economies of Scale
Chevron embraces a program aimed at procuring its surplus directly from the manufacturers, in doing so, the company succeeded in bypassing all the intermediaries that lay in wait along the supply pipe. Now, with all the marketing conditions withheld, Chevron’s has the capacity to tag its pricing with much aggression knowing that an impressive net profit margin is almost, always imminent.
Evaluation of Industry by Market a. Historical Industry P/E Ratios
While the industry has had to contend with market fluctuations over time, Chevron opted to combat these market trends by investing much of its time and energy in championing its vendors to accommodate its pricing strategies. Chevron made it possible for the prospective market to evaluate its pricing strategy and eventually, most suppliers believed that the company’s impressive offer could not be found anywhere else, making most suppliers to stick with Chevron Corporation.
Projection of Relevant Industry Variables over the Forecast Period
Cost-cutting has characterized the company as it heads towards the next fiscal year. While the oil prices may not rebound in the near future, the international energy demand remains relatively weak while Chevron’s inventory is high, allowing it to survive the variables.
Company Analysis
The following section gives insight into the total economy, the industry, and the company, by studying its intrinsic value for the common stock. External and internal information will provide good backgrounds for the company analysis (Marek 9).
Internal Information
Income Statement Analysis
First, Chevron has an upstream segment that finds and collects oil. In contrast, downstream includes manufacturing and selling energy products. The two segments determine the earnings of the company as they work collaboratively. In 2013 alone, sales forecasts show that the company made 87% of its revenue from the upstream segment (Marek 9). A significant 13% of the sales originated downstream. The global energy prices affect the profitability of the company. The company has recorded significant declines in its revenues, which had grown to 23.8% in 2010 and dove to -4.65% in 2012, and -5.4% in 2013. The industry also underwent a recent rise in costs resulting from the worldwide inflations.
Balance sheet analysis
With a debt of 9.5 of the company’s capital, analysts project that the balance sheet is clean. However, the company has now reached a sustainable level of debt as interest expenses accumulated to 50 million in 2010 (Chevron Corporation 2014 Annual Report 11). The current ratio, which considers one a safe level, is above 1.7. The return on equity bounced back after the low periods, and it is less likely to take big dips as happened before 2010.
Statement of Changes in Financial Position
Chevron’s largest strength is its large market share in the energy industry. This large producer of geothermal energy has weaknesses, including tight pollution regulations (Marek 9). The unpredictable foreign markets are a product of political instability that has plagued most of its areas of operations. The company however, has opportunities in continually advancing hydraulic fracturing. These advancements will increase the output, thereby making it more affordable. Chevron focuses more on profit margins that may increase output considerably. The company’s only threat is the competitive nature of other brands in satisfying the demands of the global village, in relation to energy.
External information
Asset turnover ratio from Moody’s publications
Asset turnover ratio (ATR) has great variations that define the performance of a company. A high ratio shows that the company is making significant strides in profitability. A cross-comparison of Chevron with its major competitors was chosen for this study. From the year 2010 to 2013, the ATR of Chevron was an average of 1.07. When compared to 1.30 at ExxonMobil and 0.45 at ConocoPhillips, Chevron is using its assets well to create revenue (Marek 9). The company is performing better than ConocoPhillips’ but is not outdoing its main competitor ExxonMobil. Chevron’s performance is consistent with industry standards, declining from its peak of 1.21 in 2010 to 0.90 in 2013. This was representative of a 26% decline, as compared to 14% from ExxonMobil and 13% from ConocoPhillips. These findings require that the company improve its operational competence to keep its ATR from falling further.
D/E ratio in Standard and Poor’s Publications
Next, Chevron has a D/E ratio that averages at 0.10 within the period of five years. The company tries to locate several approaches of financing its assets. Hence, it does not rely on debt keeping interest expenses in its performance (Marek 9). The company does not show any signs of wallowing in debt or filing for bankruptcy because of its self-sufficient financial position. Stakeholders are thus confident that the company’s presence in the industry will remain strong. The company’s option of cutting down on tighter margin operations and selling related assets has contributed further to its strong presence (Marek 9). The process will take another year or two before it ends. Then, Chevron will have no need for assets to sell, that they may generate cash and revert to debts to finance their operations.
The net income and EBIT margins in value Line Publications
An analysis of the EBIT margin before 2011 shows significant increases during the period. The net margin of the company also increased during the period. From 2012 and 2013, the net income and EBIT margins are declining. An analysis of the income statement attributes this to revenue losses. This is the most significant source for this decline. The cost of sales or operating expenses of Chevron failed to decrease in a similar fashion (Simkins & Betty 16). While expenses have decreased during the periods, it lacks similarity in its decreasing revenues. The increasing amortization and depreciation expense contributes to the lack of similarity. The company’s divesture during the periods of 2014 and 2015 allowed the company to address the concerns of decreased revenues. The asset restructuring plans of the company ensured that the company addressed the declining net income and EBIT margins.
Sales forecasts of the Wall Street Journal
Most of the earnings from Chevron were for its upstream operations that took place internationally and accrued $16.765 billion as earnings in 2014. Upstream operations within the United States alone contributed $4.044 billion. These earnings closely align with the industrial oil and gas prices (Chevron Corporation 2014 Annual Report 11). Downstream operations for company created earnings of $1.4560 billion and $787 million in the US alone. Other operations showed a negative trend towards earnings. The segments associated with the downstream segment were closely related.
Earnings
The cyclical nature of the business was evident during the periods were evident from 2001 to 2010 with the company failing to recover from its EPS high of 11.67% (Chevron Corporation 2014 Annual Report 11). During the last years, 2013 and 2014, the company EPS stood at $12.54 and $13.16 respectively. Analysts predict a 32% increase for the company for this and the next financial year. In 2014, the company earned a $3.09/share, a significant difference from $2.27 in 2013. The company cites high oil prices as well as elevated margins because of these reasons (Chevron Corporation 2014 Annual Report 11). Free cash flows are more erratic than earnings, meaning that it went from the negative in 2009 when the cash from operations failed to cover the cap-ex of 19.8 billion. The company only has a reserve of 19.4 billion, making it a red flag. Chevron got ready for increasing its production prices through recovery.
Margins
Margins have bounced back as the company operated at net margins that were near the highest in 2010. The ten-year average from 2004 to 2014 is an operating margin of 23.9% with the figures of 2014 standing at 24.5%. The operating margin for 2014 was 24.5% with the net average margin operating at 9.3% (Chevron Corporation 2014 Annual Report 11). Maintaining these margins up is important, given that the cyclical nature of this business keeps the margins up when prices go up are challenging reduces the declining oil prices. The historic margin of the company shows that it has not been able to accomplish margin peaks. Yet, during bad years, the margins tend to sink with the drop in oil prices since everything goes with them. The stock buyback program aids the company earnings and the price of stock per share. Beginning with 15 billion in 2007, the program has continued with no limit or cap (Chevron Corporation 2014 Annual Report 11). The company repurchases stock amounts of between $500 million to $1 billion after every forecast period.
Valuation and Recommendation to buy
The current section evaluates the value of a common stock using industry variables, economic factors, and an analysis of the financial statement. This section determines the overall economic value of the stock in the long term.
Dividend valuation
Chevron increases its dividend every 24 years with a rate of $0.78 per quarter, giving a stock yield of 3%. During the past decade, dividends have grown by 8.7% and have slowed because of the dividend size (Chevron Corp. CVX n.d.). The company has undergone a $3 dividend increase as opposed to the increase on the $0.10 dividend. Chevron is confident about its growth for 2015 as the annual increase in dividends reflect a 9.9% growth. The company is hoping that the prices may stay elevated. The payout issues from the last decade where cash and earnings jumped to 100% (Chevron Corp. CVX. 2015). The amount has come back to low levels of 50%, making it something that they need to watch over, despite its cash flows and earnings.
Cash flows valuation
Although the revenues of Chevron had irregular growth, the cash flows of Chevron for the period of 2014 increased significantly from the previous years (Chevron Corp. CVX. 2015). The company recovered by a margin of 37% to make sales that brought the ten-year average rate to 7.5%. Given the nature of the cyclical industry, this may not be a reliable indicator, making it more important to analyze the company in cycles. Presently, the prices of the company are up swinging, as the prices of oil increase. The sales have increased significantly from 2010 and without a drop, they should hold firmly in the current year (Chevron Corp. CVX. 2015).
Recommendations
A reason for recommending the purchase of the stock is the divestiture plans and asset restructuring of the company (Chevron Corporation 2014 Annual Report 13). In 2014, the company recommended a $10 billion divestiture plan that was to continue towards 2016. As of 2014, the company received $1.6 billion of the divestiture proceeds before announcing $2.5 billion in sales. The company sold its non-core assets before slowing expansion into new areas. The company has redeployed capital to projects with higher margins. The strategy will make the oil giant more efficient over the coming years.
Chevron ploughs its stock repurchase plan, into the company to ensure its internal growth. The company realizes that it has major projects that it needs to work on and the best significant investments to make are in the company itself. The company repurchased $1.25 billion to initiate the restructuring of capital during the late months of 2014 (Chevron Corporation 2014 Annual Report). The company also bought a similar amount for the fourth quarter. Redeploying some of its cash was a good idea for the company as they caused a rise in Chevron’s stock price. Alongside the company’s restructuring plan, some projects are ongoing. For instance, Chevron engages in its Gorgon and Wheatstone projects the company began in Australia. The company made significant $10 billion dollar investments into the two projects that are expected to produce high cash flows (Chevron Corporation 2014 Annual Report n.d.). The company has also increased oil production in Permia Basin. The production forecast has positive effects that may translate well for the company.
Chevron states that Chevron is able to reinvent itself. The Capex ratio shows the ability of firms to retrieve long-term assets from free cash flows. The ratio holds that where firms experiences sequential capital expenditures, the long-term assets and the free cash flow are bound to show varying fluctuations (Simkins & Betty 16). The Capex ratio went from 76.16% in 2009 to 102.96% in 2013. The data is an indication that Chevron is able to use its financial ability when making reinvestments into itself. The increase is attributed to capital expenditures that the company has engaged in these previous years.
The investor will identify few negatives. First, industry analysts note that the oil industry may never exist because it is depleted. Yet this will not happen in the near years, meaning that it is not within the thesis of portfolio investment. This analysis is a projection that energy experts believe is inevitable. Next, the energy sector does not offer opportunities for further expansion in more renewable resources. The company cannot hold the market before it becomes a necessity to join. The company also deals with lawsuits that call for insurance against possible losses such as those experienced by British Petroleum. This could leave the livelihood of the company at stake.
References
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Marek John 2013, Chevron (CVX): Recommendation: Buy. PDF file. Web.
Morgan, Bryce 2013, Chevron (CVX): Energy – Integrated Oil and Gas. PDF file. Web.
Pinto, Jerald, Henry, Elaine, Robinson, Thomas, and Stowe, John. Equity Asset Valuation, New York, US: John Wiley & Sons, 2010. Print.
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