If Exxon Mobil (NYSE:XOM) had the wrong kind of earnings beat, it would seem that Chevron (NYSE:CVX) had the right sort of miss. More to the point, Chevron continues to operate one of the most profitable upstream businesses among the oil majors, and the company has a rich pipeline of growth projects to maintain higher production levels across the next five years. Coupled with an undemanding valuation, Chevron looks like a solid name to consider for broad international energy exposure.

Discount Brokers Comparison: Your one-stop shop for finding the perfect broker for your investments.

Earning Where It Counts
Where Exxon Mobil posted better than expected earnings but missed estimates on upstream profits, Chevron's adjusted EPS were actually below the sell-side average on higher than expected upstream profits. Given that many analysts and investors seem to view downstream operations (refining and chemicals) as non-core distractions to these companies, I would expect a generally positive reaction to these results.

Total reported revenue declined 6% from the year-ago quarter, but metrics like company-wide revenue and operating income don't count for much in this space. More importantly, Chevron's production was solid this quarter, as production increased 1% from the year-ago level and fell just 1% sequentially. By comparison, Exxon reported a nearly 4% decline, while ConocoPhillips (NYSE:COP) was down almost 2%.

Chevron remains an oil-heavy (about two-thirds of production) story, and that is certainly helping profits. Chevron's upstream profits fell 4% from last year, but rose 8% sequentially and unit profitability came in at just under $25 per barrel of oil equivalent. That's meaningfully more profitable than Exxon and Conoco, more profitable than Hess (NYSE:HES) as well, and likely second only to very oil-heavy Petrobras (NYSE:PBR).

Relative to Exxon, Chevron certainly didn't do quite as well on the downstream side. Downstream earnings were up 15% from last year, but down about one-quarter sequentially, and lower than analysts expected.

SEE: Oil And Gas Industry Primer

Oil Today, Oil Tomorrow … And Oil Forever?
While Exxon gets a lot of positive press for it's long-term management philosophy and strong long-term returns, Chevron has actually been the more profitable company recently, and the one with better cash returns.

You don't have to go very far to see why – where Exxon (and many other majors) have established a nearly 50/50 mix of oil and gas, Chevron has been much more heavily weighted towards oil. As has been well and thoroughly discussed, U.S. natural gas prices have been pretty poor for a while now, all while production costs have been increasing.

The big question in my mind, though, is whether this will continue to be true in the future. Companies like Cummins (NYSE:CMI) and Caterpillar (NYSE:CAT) have been doing more and more to support an eventual transition towards away from reliance on crude oil-based diesel and towards alternative natural gas fuels. Likewise, many other industries have been looking to switch towards natural gas as a cleaner, cheaper energy source. So that leads to the long-term question of whether natural gas prices are destined to climb (and/or outperform relative to oil) and reward companies like Exxon and BP (NYSE:BP) that have more balanced portfolios.

To be sure, Chevron hasn't entirely neglected natural gas. The company has significant LNG projects like Kitimat, Gorgon, and Wheatstone under development, and Chevron has quietly assembled quality U.S. unconventional gas assets. Still, I suppose you could argue that Chevron may need to do a deal at some point in the future to shift its oil/gas balance more towards gas (especially in the U.S.), but once it becomes clear that's necessary, the prices for good assets will have already gone up significantly.

SEE: What Determines Oil Prices?

The Bottom Line
The theoretical discussion of Chevron's future position in natural gas notwithstanding, I do like Chevron quite a lot among the oil and gas majors. The company's reserves have good geographical balance and management has shown that it can deliver the profits. While the company is going to have to commit considerable capital to develop projects, that's broadly true for everybody. I might argue as to whether Chevron deserves the 10% or so valuation discount it often gets to Exxon, but even if it does the shares look too cheap today, as fair value would seem to be around $130 per share.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Retirement

    Introduction To Bond Investing

    Learn how you can create a diversified portfolio with bonds.
  2. Investing

    What Is Contrarian Investing?

    Learn the method and reasoning behind this contradictory investment strategy.
  3. Active Trading

    The Value Investor's Handbook

    Learn the technique that Buffett, Lynch and other pros used to make their fortunes.
  4. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  5. Investing

    Redefining the Stop-Loss

    Using Stop-losses for trading doesn’t mean ‘losing money’, but instead think about the money you'll start saving once you learn how they work.
  6. Fundamental Analysis

    10 Major Companies Tied to the Apple Supply Chain

    Apple has one of the best supply-chain models. Here are some of the top businesses involved, and the benefits and challenges for all.
  7. Economics

    Who Wins With Low Energy Prices? 

    Low oil prices are here to stay for some time. Which economies will benefit or lose from the low oil price regime?
  8. Term

    What are Non-GAAP Earnings?

    Non-GAAP earnings are a company’s earnings that are not reported according to Generally Accepted Accounting Principles.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
  10. Investing Basics

    A Primer On Investing In The Tech Industry

    The tech sector can provide fantastic returns for investors with a little know-how in the field.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Middle Market

    Definition of middle market
  6. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  6. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!