The Street currently rates Chevron (CVX) near a "strong buy" versus a "buy" for both Occidental Petroleum (OXY) and Marathon (MRO). With informational flow concentrated on Brazil setbacks and uncertainty looming over the 2016 project developments, Chevron's wait-and-see story has held back value. But for investors willing to focus on the long-term and benefit by the reinforcing of global recovery, Chevron is expected to be a winner among majors.
From a multiples perspective, Chevron is by far the cheapest of the three. It trades at anomy a respective 7.7x and 7.6x past and forward earnings. This compares to a respective 12.1x and 13x past earnings for Marathon and Oxy. Moreover, Chevron is also the safest with 20% lower volatility than the market and the highest dividend yield at 3.2%.
At the fourth quarter earnings call, Oxy's CEO, Steve Chazen, noted the successful achievement of management objectives:
"We finished a strong year in terms of the 3 main performance criteria that I outlined last quarter. Our domestic oil and gas production grew by about 12% for the total year to 428,000 BOE per day. Fourth quarter domestic production of 449,000 BOE a day is the highest U.S. total production in OXY's history, reflecting the highest ever quarterly liquids volume of 310,000 barrels per day, the second highest quarterly volume for gas.
Total company production increased about 4% for the year. Our chemical business delivered exceptional results for the year, achieving one of their highest earnings levels ever. Our return on equity was 19% for the year and our return on capital was 17%. We increased our annual dividends by $0.32 or 21% to $1.84 per share. We expect to announce a further dividend increase after the meeting of our Board of Directors, the 2nd week of February".
Chemicals rose by 30% y-o-y while average upstream production incrementally gained by 3% sequentially. Consensus estimates for the firm's EPS forecast that it will decline by 0.2% to $8.37 in 2012 and then grow by 15.2% and 5.1% in the following two years. Assuming a multiple of 13.5x and a conservative 2013 EPS of $9.56, the stock may rise by 30%.
As for Chevron: during the fourth quarter, the company faced unexpectedly high international taxes and non-cash exploration expenses. Volumes were also slightly weak and production is expected to grow by only 1%. I believe this slow growth has caused investor fatigue - a sentiment that will abruptly change, in my view, come 2014. Management will be addressing capital structure at this point as upfront expenses come in from the major projects following in the next two years. The LNG Australian projects could possibly rise production growth to 6% following 2016. With upstream earnings outperforming the competition and greater exposure to oil, Chevron is well positioned to gain rom a recovery. Moreover, the firm is uniquely capable of exploiting Latin Americana and Asian demand due to its concentration of refineries around the Pacific rim, adjacent to export locations.
Consensus estimates for Chevron's EPS forecast that it will decline by 3.4% to $12.75 in 2012, grow by 5.7% in 2013, and then decline by 1.3% in 2014. Assuming a multiple of 11.5x - below peer levels - and a 2013 EPS of $12.74, the firm may break $145. Although I do not believe that the firm will reach this target, its multiple is going nowhere but up as uncertainty dissipates.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CVX, MRO, OXY over the next 72 hours.
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