CHEVRON, THE INTEGRATED OIL GIANT, marks the new year with a changing of the guard. Chairman and CEO David O'Reilly, 62, has retired after 41 years at the company, including 10 at the helm, and has handed the reins to John Watson, 53, a veteran of a mere 29 years.
Such continuity is only one of Chevron's (CVX) many assets, although it is likely to prove critical as the San Ramon, Calif.-based company embarks on numerous exploration projects around the world, and seeks to replace reserves at a time when that has proved difficult and costly.
Chevron also benefits by being one of the "oiliest" of the world's major energy producers, as crude oil prices, up 75% in 2009, to nearly $80 a barrel, are expected to keep climbing in 2010. Natural gas, in contrast, ended last year with a gain of about 6%, and the outlook for this year is uncertain.
Oil exploration and production contributed 86% of Chevron's profit in 2008, and crude accounted for two-thirds of the company's 11.2 billion barrels of oil-equivalent reserves at the end of that year. At rival ConocoPhillips (COP), oil accounted for 59% of total reserves, and at industry leader ExxonMobil (XOM), it's 49%, now that Exxon has agreed to acquire XTO Energy (XTO), a producer of natural gas. Chevron also has one of the industry's better exploration-growth profiles.
Given these and other attributes, a growing roster of oil analysts and investors are upbeat about Chevron's prospects -- at the wellhead and in the stock market -- in 2010. The company's fans think the shares, now 77.21, could rally more than 20% in the next 12 months.
Investors also collect an annual dividend of $2.72 a share, for a current yield of 3.5%. That payout, totaling about $5.5 billion, makes Chevron one of the largest dividend payers among the S&P 500's members.
ALL THE BIG OIL COMPANIES FACE similar challenges, including rising costs for equipment, services and refinery upgrades. But the group's stock performance diverged sharply in 2009. Shares of European integrated oil companies rose as the euro strengthened against the dollar, while shares of the U.S. majors didn't fare as well. Chevron was able to cut costs ahead of schedule; its shares ended the year up only 8%, although they have rallied about 37% from the market's low in March.
Bank of America Merrill Lynch calls Chevron its top pick for 2010 among the major integrated oil companies. It has a price target of $95 -- roughly 23% above the current price. The bank is assuming, perhaps conservatively, that oil prices will rise to about $85 per barrel in the coming year, and that natural gas will hover around today's price of $6 per million British thermal units.
Analysts in general are upbeat about Chevron's earnings prospects: They expect the company to net $16 billion, or $7.75 a share, in 2010, on revenue of $185 billion. That is up from an expected $5.06 a share in 2009, on estimated revenue of $163 billion. As profits improve, Chevron could resume buying back shares, and perhaps boost its dividend.
"One of our favorite integrateds is Chevron," says Bryan Bell, an energy analyst at Federated Investors. "It has one of the strongest organic growth profiles among peers, more exposure to oil...and lower relative exposure to U.S. refining."
While Exxon has made a big bet, with its XTO purchase, on domestic natural-gas shale plays, Bell says Chevron "doesn't need to do a big deal" because it has such good "organic prospects."
In recent presentations, Chevron has highlighted six major capital projects in which $25 billion invested in recent quarters resulted in peak production in excess of 900,000 barrels per day of oil-equivalent. To put that in perspective, Chevron's overall production declined by about that much in 2008 in the face of reduced demand. In all, the company has about 40 major projects around the globe.
In 2008, about a quarter of Chevron's production was centered in the U.S. Some 10% was in Kazakhstan, and slightly less in Indonesia. The company has significant projects in Thailand, the Gulf of Mexico and off the coasts of Africa and Australia.
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