RD's Picks

Chevron broke out over $100 a share last Friday and held triple digits through this week. Breaking that nice, round number seemed like a good time to do a recheck on the stock value to see whether I should trim my holdings, add more or stand pat.

Last quarter, CVX earnings beat estimates by 7 cents a share on strong oil pricing. Nearly all the profits were from the upstream, or oil production, side of the business. Downstream operations, refining and marketing, only kicked in $252 million of the over $5 billion of profits.

On a fundamental basis, CVX looks cheap. It trades at a fwd PE of 9; a little cheaper than XOM and a little more expensive than COP. They have about $2 billion of net cash. CVX pays a dividend, current yield is 2.5%. The big unknowns are whether oil prices will continue to climb or pull back and, if oil prices pull back, will refining crack spreads widen so the downstream ops start adding more than token earnings?

Using USO as a proxy for oil prices, oil is about 32% higher at the mid-point of this quarter than it was last quarter. Analyst estimates for next quarter's earnings average 2.91 a share, 17.3% above last quarters 2.48. Future oil price predictions are all over the map. Some argue crude is in a speculative bubble and will pull back to under $100 a barrel. T. Boone Pickens is predicting oil will hit $150 this year. I certainly don't know where prices will be later this year, but given the higher oil prices so far this quarter I think there's a good chance CVX will beat earnings again next quarter.

I'm inclined to hold what I've got both in SLO and real life. Basically, the stock is performing well and doesn't look overvalued, but it's hard to justify chasing it higher.

The bull case boils down to the stock selling at a low multiple with a good chance of continuing earnings beats. The stock price also hasn't risen as fast as crude prices over the past several months, so even if oil does pull back, the stock price should hold up pretty well. The bear case boils down to the stock having a strong run since last fall and taking profits makes sense. After the fast run-up in crude prices, a pullback could still drag oil companies down with it.

Feel free to add a comment with your thoughts. Are oil companies still looking good or is it time to take the money and run?

Comments: View Comments |  Saturday May 24, 2008  |  Stocks: CVX,