Chevron’s Competitive Advantages
Major oil corporations get massive government subsidies because energy production is a ‘national interest’. The largest oil corporations (like Chevron) have a history of working with the United States Government.
The image below shows how important government positions often lead to lucrative roles in oil companies (including, of course, Chevron):
Source: Geke Econo Memes
In 2013 alone the United States federal and state governments provided $21.6 billion in subsidies for oil production and exploration. Chevron spent over $8 million in 2014 on lobbying.
Source: Open Secrets
Chevron has a significant and lasting competitive advantage by having influence over and relationships with the most powerful organization in the world, the United States government. This is not a political article and does not take a stance on whether oil subsidies and corporate lobbying are right or wrong. This is simply the society in which we live.
In addition to its government based competitive advantage, Chevron is also a low-cost producer of oil and natural gas. Chevron’s large size allows it to invest in the largest and most profitable oil and gas ventures. Chevron regularly partners with other major integrated oil and gas corporations to tackle extremely large projects together; spreading capital expenditures over several companies and sharing in the rewards. This reduces the risk of the company’s portfolio while still taking upside in projects throughout the world.
Recession Performance
The last time oil prices fell precipitously was the Great Recession; in 2009. Chevron’s earnings-per-share through the Great Recession and subsequent recover are shown below:
– 2007 earnings-per-share of $8.77
– 2008 earnings-per-share of $11.67 (high at the time)
– 2009 earnings-per-share of $5.24 (recession low)
– 2010 earnings-per-share of $9.48
– 2011 earnings-per-share of $13.44 (new high)
While Chevron sees earnings decline significantly during periods of low oil prices it remains profitable. A similar outcome is likely in today’s low oil price environment.
Final Thoughts
Chevron Corporation (NYSE:CVX) is currently trading at just 6.4x its peak earnings (from 2011). The company appears deeply undervalued at this time.
Chevron is cheap due to oil price declines. If oil prices rise Chevron shareholders could see large gains from both increased earnings and a higher price-to-earnings ratio.
Chevron has an above average range using The 8 Rules of Dividend Investing. The company’s extremely high dividend yield, low valuation, and solid growth prospects should provide market-beating returns for dividend growth investors who can withstand the stock’s high volatility and above average risks.
Disclosure: None
