Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Opportunities

Is Chevron Losing Money?

The Chevron Corporation (NYSE: CVX) is doing something extraordinary for an oil company. Chevron admits it will write off $11 billion worth of oil and gas assets in a press release.

Essentially, Chevron admits it will never make money from $11 billion worth of shale gas and other resources. Most of those assets comprise natural gas and oil in Appalachia; and other locations in the US, The Oil Price reports.

The write off is large because Chevron reported a quarterly gross profit of $15.175 billion on 30 September 2019. In addition, Chevron reported $36.116 billion worth of revenue of quarterly revenues on the same day.

Moreover, Chevron had $11.755 billion in cash and short-term investments on 30 September 2019. Hence, Chevron, wrote off assets nearly as a large as it savings.

Is Chevron Making Money?

The asset write down comes at a bad time because Chevron is making less money. For instance, Chevron’s gross profit fell from $16.968 billion on 30 June 2019 to $15.175 billion on 30 September 2019.

In addition, Chevron’s operating income fell from $5.935 billion on 30 June 2019 to $4.049 billion on September 30 2019. Meanwhile, Chevron’s net income fell from $4.305 billion to $2.58 billion in the same period.

In addition, Chevron’s operating cash flow fell to $7.817 billion from $8.783 billion in the same period. However, Chevron’s ending cash rose from $3.129 billion during the same period.

Finally, the revenues fell from $38.85 billion on 30 June 2019 to $36.116 billion in three months. Thus Chevron is making less money, when it is writing off assets.

The Incredibly Shrinking Revenue

Chevron’s revenues are shrinking at an astounding rate. Stockrow estimates Chevron’s revenues shrank at a rate of -17.89% in the quarter ending on 30 September 2019.

Furthermore, the period ending on September 30 was the third quarter of shrinking revenue growth at Chevron. Chevron reported a negative revenue growth rate of -8.02% on 30 June 2019. Hence, Chevron’s negative revenue growth rate more than doubled in three months.

Chevron’s revenue growth has been shrinking all year. The company reported a revenue growth rate of -6.79% on 31 March 2019.

What Value Does Chevron Have?

Chevron (NYSE: CVX) still possesses a lot of value including some impressive energy projects.

For instance, Chevron owns 4.73% of the Gorgon Project which it calls the largest single-resource development in Australian history. Chevron claims Gorgon can produce up to 2.6 billion cubic feet of natural gas and 18,000 barrels of oil.

Meanwhile, Chevron claims the Jack/St. Malo project in the Gulf of Mexico could recover 500 million oil equivalent barrels of oil. In 2018, Chevron claims Jack/St. Malo produced 139,000 barrels of liquid oil and 21 million cubic feet of natural gas a day.

In addition, to Jack/St. Malo, Chevron’s Big Foot Project foot could tap 75,000 of oil and 25 cubic feet of natural gas a day in the Gulf of Mexico. Chevron claims Big Foot could contain over 200 million barrels of oil equivalents.

Closer to home, Chevron has massive investments in the Permian Basin where it holds 2.2 million net acres of oil and gas properties. Chevron claims to have produced 159,000 barrels of crude oil and 501 million cubic feet of natural gas in the Permian in 2018.

Chevron could tap the Chinese Market

In addition, Chevron owns 64.1% of Wheatstone, Australia’s first third party natural gas hub. Chevron claims Wheatstone can process up to 8.9 million metric tons of liquefied natural gas per year.

They can ship liquefied natural gas (LNG) from Wheatstone to China. The People’s Republic of China could become the world’s largest economy next year.

The Standard Chartered bank projects China could become the world’s largest economy in 2020. In addition, they can ship gas from Wheatstone to India, which Standard Chartered projects to become the world’s second largest economy by 2030.

Chevron claims Tengiz produced 269,000 barrels of crude oil, 397 million feet of natural gas, and 19,500 barrels of liquid gas in 2018. Tengiz is a vital resource because they could build pipelines to Europe and China from it.

Moreover, Tengiz is close to China’s Road and Belt Initiative; or New Silk Road.  The Road and Belt Initiative is a scheme  to connect the People’s Republic and Europe by rail, sea, pipelines, and road. Several parts of the Road and Belt Initiative run through Kazakhstan. Business Insider claims the Chinese government could spend between $1 trillion and $8 trillion on the Initiative.

Is Chevron a Value Investment?

Given these potential resources I think Chevron is a value investment. Notably, I think Mr. Market priced Chevron fairly at $119.34 on 16 December 2019.

Chevron is a value investment because there is still a huge potential market for Chevron’s products. Electric vehicles; such as the Tesla Motors (NASDAQ: TSLA) products, are impressive but far from widely used.

In fact, the Alliance of Auto Manufacturers estimates electric vehicles accounted for just 1.2% of US auto shares in 2018. Plus, Electric vehicles account for 7.84% of sales in high adoption areas such as California, Interesting Engineering claims. Therefore, most of us will still fill our tanks with Chevron’s signature products for years.

European automakers; however, are under pressure to sell electrics. Reuters reports the European Union (EU) could force European automakers to cut emissions by 37.5% by selling electric cars by 2021.

 Strangely, Chevron could make money from electric vehicles because natural gas is a popular less-polluting fuel for power plants. In fact, utilities used 34% of Chevron’s natural gas for electric production in 2018, Geology.com estimates. Burning natural gas produces 45% less carbon dioxide than burning coal.

Chevron as a Value Investment

Hence, Chevron’s (NYSE: CVX) energy resources could have a lot of value for a long time. Even with new technologies; such as solar electric, and theoretical power sources such as hot fusion.

Furthermore, Chevron paid an annual dividend of $1.19 on 15 November 2019. Currently, Chevron offered dividend yield of 4.04%, an annualized payout of $4.76, and a payout ratio of 74.5% on 16 December 2019. Appealingly, Chevron offers 33 years of dividend growth, Dividend.com reports.

Thus, Chevron is a great dividend stock, but it is a risky investment because of the way technology is disrupting the energy business. Those who can live with a level of risk but want dividend income, need to investigate Chevron (NYSE: CVX).