My Recent Energy Purchases – Part 2

Adam Energy, Investing 3 Comments

As I wrote about here, I believe large cap energy has a lot of value, and I outlined my new position in BP.

I mentioned a few articles back, energy have been in deep decline recently and has gone down even more since the OPEC meeting Thursday. Almost all energy names have slide considerably across the board, so I’m now in the red on my purchase above. Because I work in the industry,
my employment is very much tied to the health of oil and gas as well as a significant chunk of my portfolio (Conoco and Phillips 66) that carries over from stock related compensation in my last job and a significant chunk of restricted stock in my current company (BHP Billiton).

Therefore I’m always wary to add any additional exposure to the sector. However you should follow the value, which in this case is in the energy sector. I’m a firm believer in building a long-term portfolio with minimal turnover from high quality companies paying a strong dividend. The recent pullback in oil pricing does nothing but create opportunity if you have a 10-20 year view.

Having said all that, lets talk about Chevron.

Chevron (Purchased at $111.38)

Screenshot 2014-11-29 at 5.47.22 PM

 

Screenshot 2014-11-29 at 5.54.35 PMChevron is a world class international oil company with a size and scope matched by only a few non-governmental entities around the world. The Company has a pristine balance sheet, gushes cash, pays a solid dividend, and has a phenomenal operating record. Chevron is one of the companies that I would be comfortable putting in to my “permanent portfolio” of companies that I can purchase, put in the vault, and ignore for the next 20 years.

Recent price activity in the oil sector has knocked the company down significantly from recent highs and the current price is now lower than my entry point of $111. I’ll most likely let the market digest the news from OPEC and establish a 2nd half to my position.

Screenshot 2014-11-29 at 5.56.39 PMChevron just reported for Q3 with sales of $51.8B and YTD sales of $158B. Both are lower year over year, but this is predominently a price issue. Cash from operations was $25B (which I continue to find amazing). EPS was $2.95, with YTD of $8.29. Almost all of the major IOC’s have prestine balance sheets, but Chevron is in a field with only Exxon. It currently has over $14B in cash D/E of 0.07. Chevron continues to reduce sharecount aggressively for a company of its size, buying back 5.5% since 2011 and 1.7% in just the past year.

Screenshot 2014-11-29 at 5.56.20 PMAt 108, Chevron is trading for only 10x earnings with expectations of growth between 4-5% going forward. While the bulk of the majors trade for less than market PE, 10x is lower than the bulk of its peers that trade in the 11-12 range. Chevron is a clear Dividend Aristocrat, increasing its payout every single year for the past 27 years with a growth rate of roughly 10%. You can see their dividend history here.

Currently, the companies dividend yield is an incredibly impressive 3.9% in such a low yield environment and it manages to do this with a payout ratio of only 42%, leaving room for further dividend growth. Management has also expressed numerous times its committment to increase dividends and return excess capital to shareholders. Shareholder friendly management is always a must and I believe the Chevron management team continues to demonstrate this.

What are the risks? Chevron has not been able to show production growth over the past few years and is currently in an extremely high capex phase, causing free cash flow to be negative last year. Luckily the 2nd problem should solve the first, as several megaprojects (Wheatstone and Gorgon) near completion. This will bring on long-term production as well as allow the company to taper its capex post 2016.

I highly suggest you go look through their most recent investor presentation and get a better handle on the details of their upstream and downstream portfolio, their current and future production projections, and other projects. It’s important for investors to understand those details at least on a cursory level, but that type of depth is beyond the scope of this piece. My focus is on showing my thought process for building long-term, dividend paying assets, through investing in permanent portfolio type companies.

Disclosure: Long BP, COP, CVX.

All images from Chevron’s November 2014 investor presentation.

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