To most consumers, San Ramon, Calif.-based Chevron Corp. (NYSE:CVX) is little more than a gasoline retailer – a place to fuel up, squeegee your windshield and inflate your tires. In point of fact, Chevron is a $237 billion leviathan that trades at a modest 11 times earnings, has increased its dividend payments every year since the mid-1980s, and boasts a stock chart that looks like a math textbook example of an exponential function. Are those superlative measures nothing more than byproducts of being a major global player in a vital industry, or is there more to Chevron’s profound success than that?

One of the 6 largest petrochemical companies on Earth, Chevron is the very embodiment of the epithet “Big Oil.” Like its competing petroleum producers, Chevron classifies its primary operations into the categories of “upstream” (discovery, extraction) and “downstream” (refinement, processing), each of which makes its own distinct contributions to the company’s bottom line. Downstream also includes Chevron’s chemical operations; specifically commodity petrochemicals, and fuel and lubricant additives derived via the company’s refining processes.

It’s no surprise that Chevron primarily explores for and produces oil, with natural gas a distant secondary business. Chevron conducts its upstream oil operations around the world, often in areas not traditionally considered petroleum development hotbeds. Upstream profits actually declined in the most recent fiscal year, although $17 billion in net income is hardly anything for investors to complain about. According to Chevron’s own internal documents, the decrease was largely the result of factors beyond the company’s control (e.g. crude oil prices, currency movements). To remain dynamic and growing, Chevron has taken to expanding its operations in heretofore underdeveloped areas. These new ventures include the single-largest resource undertaking in the history of the Australian continent. Located off the northern shore of Western Australia, the Gorgon project is all but complete and will eventually develop enough liquid natural gas for both domestic use and export. Chevron also has comparably large investments in Angola that total $10 billion, money that Chevron could conceivably take from its voluminous cash on hand and still have $6 billion remaining.

Mostly Upstream

Despite the relative downturn in 2013, upstream operations represented 97% of Chevron’s profits during the most recent fiscal year. Of that, 19% came from operations in the United States, reinforcing a downward trend that’s been in place for several years. Or, if you prefer to look at the other side of an extremely lucrative coin, international operations are becoming gradually more important with each passing year.

Upstream, Chevron produces two primary commodities: crude oil and natural gas. The per-unit spot prices of each have remained consistent over the last couple of years, decreasing 1.6% and 1.4% respectively between 2012 and 2013. While production has ramped up in certain parts of the world under Chevron’s purview (the Gulf of Mexico, Alaska), comparable reductions in other places (Brazil, Kazakhstan) have offset the advances, leaving the company’s large revenue and profit numbers relatively unchanged.

Oil Above All

As much as natural gas is touted as ecologically beneficial (clean burning, minimal byproducts, low toxicity), it still remains an exceedingly distant second to crude oil in terms of worldwide importance. In 2013 Chevron extracted 449,000 barrels of net crude oil (plus an ancillary product, natural gas liquids, as distinguished from natural gas) in the United States daily. At $93.46 per barrel (and granted, that price fluctuates over the course of a year), that means annual revenues of about $15.3 billion. Contrast that with domestic daily natural gas production of 1.246 billion cubic feet, and with natural gas selling for 0.337¢ per cubic foot, that means that Chevron generates 10 times as much revenue from crude oil as it does from natural gas.

Looking at Chevron’s global operations, the relative importance of the two commodities is similar to what it is domestically. International crude oil prices averaged 7% higher than they did in the United States, while natural gas prices averaged 75% higher (the latter discrepancy thanks mostly to a domestic glut). Crude oil revenues were about eight times larger than natural gas revenues in Chevron’s non-U.S. markets.

The Bottom Line

Stupendous year-over-year growth is the province of young upstart companies, something Chevron hasn’t been for several decades. As a legacy corporation, and an entrenched component of the Dow 30 with operations in 180 countries and annual sales of about $220 billion, Chevron seems to be scraping against the upper limit of how large a company can get, or at least how large a company can get given the limitations of current oil- and natural gas-producing technology. Chevron’s substantial investments in alternative energy (solar, wind, geothermal) notwithstanding, the company remains an oil producer more than anything else. With crude oil and its derivatives still offering greater energy density than any fuel this side of uranium, it appears that Chevron will continue to be a dominant player in the world economy for the foreseeable future.



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