Chevron Stock Commands Premium Valuations

Chevron (CVX) trades at a forward PE ratio of 16.8x, which is above the peer average of 13.0x. ExxonMobil (XOM), PetroChina (PTR), and Suncor Energy (SU) also trade above the average forward PE ratio at 17.4x, 14.9x, and 17.0x, respectively. In contrast, Royal Dutch Shell (RDS.A), BP (BP), Total (TOT), and Petrobras (PBR) trade under the average at 11.4x, 12.4x, 10.6x, and 11.5x, respectively.

Chevron trades at a forward EV-to-EBITDA multiple of 6.5x, which is above the peer average of 5.0x.

Chevron stock trades above the peer averages. Let’s look at why the stock trades at a premium.

Chevron’s financials got stronger in 2018. The company’s cash flows from operations rose 51% in 2018. The larger cash flow drove Chevron’s dividend payment, capital expenditure, balance sheet health, and share repurchases. Chevron’s debt position solidified during the year.

Chevron has a strong upstream portfolio, which is expected to drive the company’s volume growth. Chevron’s upstream assets like Gorgon, Wheatstone, and the Permian have been ramping up, which adds to the company’s output. Chevron’s volumes rose 7% in 2018. In 2019, Chevron’s volumes are expected to rise 4%–7%.

Chevron’s advantaged downstream portfolio supports the integrated earnings model. Chevron has successfully created an integrated earnings model that’s capable of supporting the company’s total earnings in a volatile oil price environment.

Chevron’s premium is likely due to its financial strength, strong upstream portfolio, and integrated earnings model.