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Chevron’s Valuation Is Higher than Historical Averages

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Dec. 4 2020, Updated 10:43 a.m. ET

Chevron’s valuation trend

Chevron (CVX) traded at an average PE (price-to-earnings ratio) of 11.7x from 1Q13 to 3Q15. The PE measures the company’s price per share as a multiple of EPS (earnings per share). Also, the PE is subject to stock price volatility and is affected by EPS. In turn, EPS is a factor of numerous variables, including realizations, volumes, costs, and margins. Usually, the higher the PE, the more expensive the stock.

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CVX’s PE has generally shown an uptrend during the past three years. In 3Q15, the stock traded at a PE of 15.9x, or its highest in this period. In the past four quarters, CVX saw its profits squeezed due to lower upstream earnings. This was despite the fact that the refining earnings improved significantly. The situation is similar for CVX’s peers BP (BP) and Royal Dutch Shell (RDS.A).

Chevron’s EV-to-EBITDA and price-to-cash flows

From 1Q13-3Q15, Chevron’s EV-to-EBITDA[1. Enterprise value to earnings before interest, tax, depreciation, and amortization] and price-to-cash flows ratios stood at averages of 6.2x and 6.7x, respectively. The EV-to-EBITDA ratio is affected by changes in EV as well as EBITDA. EV, or enterprise value, is broadly measured as market capitalization plus debt minus cash. EV reflects the theoretical purchase value of the entire firm and is subject to market volatility. On the other hand, EBITDA is affected by a company’s operating and financial performance.

In 3Q15, the EV-to-EBITDA and price-to-cash flows ratios saw highs of 8.0x and 6.9x, respectively. As explained above, in the past four quarters, CVX saw lower EBITDA, translating into lower earnings and cash flows.

Like PE, both ratios are higher than their historical norms. Integrated energy majors like ExxonMobil (XOM) and Chevron (CVX) have traded at premium valuations due to the decades of experience that they have in sailing through oil price cycles. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has XOM and CVX in its portfolio. The ETF has exposure of ~6% to integrated energy sector stocks.

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