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Why Chevron Trades at a Premium to Peers

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Updated

Chevron’s valuation

In the previous part, we discussed Chevron’s (CVX) historical valuation. In this part, we’ll compare Chevron’s forward valuation with peers’.

Chevron (CVX) is now trading at a forward PE (price-to-earnings) ratio of 22.7x, above the peer average of 15.7x. ExxonMobil (XOM), PetroChina (PTR), and Petrobras (PBR) are also trading above the average. On the other hand, peers Total (TOT), Statoil (STO), and YPF (YPF) are trading below the average. Similarly, Chevron (CVX) is currently trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of 7.1x, above the peer average of 5.3x.

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Why the premium?

The premium that the market grants Chevron is likely due to Chevron’s aim to not only survive the oil price cycle but also prepare for future growth. Its robust upstream portfolio, focus on the high-return downstream value chain, and decent leverage position attest to this.

Additionally, the larger capital-intensive projects that Chevron has been investing in are operational or are likely to be operational soon, and expected to result in higher earnings and cash flow, particularly with rising oil prices. Therefore, better growth prospects and financial strength in terms of a comfortable leverage position are likely giving Chevron an edge over its peers.

If you’re looking for exposure to large US companies, you could consider the SPDR Dow Jones Industrial Average ETF (DIA), which has ~6% exposure to integrated energy majors ExxonMobil and Chevron.

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