Chevron Finds Black Gold – Time to Buy?

Case Background: Chevron Corporation (CVX) was founded in 1879 with an oil discovery at Pico Canyon (north of Los Angeles). This discovery was the foundation for the formation of Standard Oil Company, which later became Chevron Corporation. In 2001, Chevron Corporation merged with Texaco, followed by its merger with Unocal Corporation in 2005. Chevron Corporation produces 2.5 million barrels of oil per day. Seventy percent of this production occurs within the United States. Chevron Corporation operates in over 180 countries. They focus on 7 main regions: Africa, Asia-Pacific, Eurasia, Europe, Latin America/Caribbean, the Middle East, and US/Canada. Chevron has over 59,000 employees, including service station representatives. Discussion: On November 10, 2006, Chevron Corporation announced its discovery of one of Australia’s largest gas reserves.

The Clio field is estimated to be 623 feet of net gas sand, and preliminary reports suggest that the find is low in CO₂, which will result in lower extraction costs. The Clio field is a joint venture between Chevron Corporation and Royal Dutch Shell holdings; Chevron owns 67% of the Clio field operation. The gas extracted from the Clio field will be sold to North American and Asian customers. North American customers are extremely profitable and will help increase the overall sales of Chevron Corporation.

Conclusion:
In 2005, Chevron Corporation had a net income of $14.1 billion or $6.54 per share – diluted. Chevron Corporation offers an extremely high stockholder return; in 2005 it was 11.3%. Chevron Corporation’s price earnings ratio is low compared to other NYSE traded companies, but on par with other companies in its sector. Chevron Corporation has an enormous market capitalization: $151.60 billion. Chevron has a future price earnings ratio of 8.42 and earnings per share of $7.92. This is a signal to investors that Chevron can be purchased at an economical price despite its bid price nearing a 52-week high.

Disclaimer:
P/E ratios are a quick way to sort out the leaders within the same sector. Never use a P/E ratio exclusively to make an investment. Remember, a P/E ratio is measured using historical trailing earnings for the previous 12 months and does not necessarily indicate strong future earnings. Price/earnings ratios, when used with other market value ratios, can help investors to make consistent returns and to minimize losses. Various interpretations of a particular P/E ratio are possible:

1. 0-13 - Either the stock is undervalued or the company's earnings are thought to be in decline.
2. 14-20 - For many companies, a P/E ratio in this range may be considered fair value.
   
   • The average U.S. equity P/E ratio is usually around 14, which means it takes about 14 years for a company's stock to earn back its full purchase price.
   • Average P/E over the entire market is a good indicator of overall market strength.
3. 21-28 - Either the stock is overvalued or the company's earnings have increased since the last earnings figure was published.
4. 28+ - A company whose shares have a very high P/E ratio either really does have an exceptionally rosy future or the stock may be the subject of a speculative bubble.
5. A company with no earnings has an undefined P/E ratio.
   

Financial information provided by http://finance.yahoo.com (11/12/2006). This investment article was edited by http://www.proof-reading.com; copyright © 2006 PE-Ratio.com. All rights reserved.