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Chevron Revitalizing with Improving Financials, Outperforms SPY

PART:
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Part 7
Chevron Revitalizing with Improving Financials, Outperforms SPY PART 7 OF 13

Why Chevron’s Valuations Command a Premium over the Peer Averages

Chevron’s valuations

In the previous article, we discussed Chevron’s (CVX) institutional ownership changes. In this part, we’ll consider CVX’s forward valuations compared with its peers.

Chevron (CVX) is now trading at a forward PE (price-to-earnings) ratio of 23.2x, above its peer average of 17.2x. ExxonMobil (XOM) and Suncor Energy (SU) are also trading above the average forward PE at 20.2x and 27.8x, respectively. 

Why Chevron’s Valuations Command a Premium over the Peer Averages

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On the other hand, its peers Royal Dutch Shell (RDS.A), BP (BP), and Total (TOT) are trading under the average at 13.2x, 16.0x, and 11.5x, respectively. 

Chevron (CVX) is currently trading at a forward EV-to-EBITDA1 of 6.8x, above the peer average of 5.5x.

Explaining the premium over the peer average

The premium that the market accords to Chevron could be due to the company’s aim to not only survive the oil price cycle but also to prepare for future growth. Its robust Upstream segment, its focus on the high-return Downstream segment value chain, and a decent leverage position attest to this position.

The massive capital-intensive projects that Chevron has been funding are becoming operational. Chevron’s upstream production is predicted to grow with Gorgon, Wheatstone, Mafumeira Sul, and some of the other major projects that have come online in 2016–2017.

In 2Q17, Chevron had all the three LNG trains surpassing their nameplate capacity at Gorgon. Wheatstone’s platform became operational with its Train 1 in a start-up phase. For 2017, Chevron foresees 4%–9% growth in its net hydrocarbon production because of new fields startups and existing fields ramp-ups, partially offset by maturing fields declines.

Chevron seems to be set to position itself as a sound energy firm, as well as to benefit from any surge in oil prices with its expanding production in its Upstream segment. Its robust Downstream segment’s assets and the integrated value chain actively produce synergetic advantages for the company.

Better growth prospects, integrated earnings models, and financial strength in terms of comfortable leverage position could be providing Chevron a premium over its peers’ averages.

From the next part onward, we’ll evaluate Chevron’s financials, beginning with its leverage.

  1. enterprise value to earnings before interest, tax, depreciation, and amortization
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