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Analysts say the dividend company is deeply undervalued

Mart Poom
30. 6. 2023
4 min read

An interesting dividend is not everything. It's also important to look at whether the company has future growth potential. That's why investors often look for undervalued companies, which may not be easy. But analysts are now pointing the finger at one.

Chevron Corporation is an American multinational energy company headquartered in San Ramon, California. It is one of the largest companies in the oil industry. Chevron focuses on oil and gas production, petroleum refining, and chemical manufacturing. It operates production facilities, oil and gas wells, refineries and processing plants around the world. Chevron has upstream and production operations in more than 50 countries.

CVX

Chevron

CVX
$159.04 $1.29 +0.82%

Oil and gas production is conducted using either traditional deepwater drilling or the more modern hydraulic fracturing method. Chevron has operations in the U.S., Africa, Asia and Latin America. Chevron operates 16 refineries around the world and sells fuels and other petrochemical products.

It also produces a range of chemicals for industrial, agricultural and consumer use, such as ethylene, propylene and solvents.

Chevron's sales are $234 billion. The COVID-19 pandemic and lower energy demand have significantly impacted Chevron's results in recent years. And according to analysts, $CVX+0.8% is now undervalued.

In April, Scotiabank raised its recommendation on the stock to Buy and also raised its target price on the stock to $200, highlighting the company's overall performance.

Currently, all estimates are above the current price.

Chevron Corporation currently offers a quarterly dividend and a dividend yield of 3.75%.

Its core business is its mining operations, from which the majority of its earnings and cash flows come. The refineries, petrochemical plants and gas stations serve more as a safety net in case energy prices drop, as they did during the pandemic.

Chevron's extraction and processing plants are supported by its marketing teams, which buy and sell energy products around the world, and its energy infrastructure.

Chevron generated most of its profits in 2022, a favorable year for energy producers, from its mining operations. The company reported free cash flow of $37.6 billion. This flow was sufficient to cover $17 billion in payments to shareholders in the form of dividends and share repurchases.

FCF $CVX+0.8% was well above the $30 billion mark

Thus, organic free cash flow from Chevron's upstream operations continues to fully cover shareholder payouts when energy commodity prices are favorable. However, more risky are the mining operations themselves, which are sensitive to fluctuations in oil and gas prices.

But beware the rose-tinted glasses. While analysts praise the strong economic potential and its cost advantages in the Permian Basin, its main asset. A healthy balance sheet and a decline in debt since 2020 speak for an improving financial position.

However, investors should consider the future price outlook above all else when buying Chevron. Also, recent tensions between Saudi Arabia and Russia over oil production create uncertainty.

In addition, Chevron plans to take over PDC Energy, one of the largest operators in Weld County, Colorado. PDC Energy has avoided the negative attention that some other oil companies have drawn to the area. However, it has failed to avoid the market's "Colorado discount" or small company discount.

The market reacted positively to the news of the merger, signaling a change in attitude toward oil acquisitions after several years when the market did not demand a premium.

The benefits to Chevron will be large from the outset due to PDC Energy's lower valuation and its strong portfolio of assets in a high-potential region. This will help offset the higher premium Chevron would have to pay to make the acquisition attractive to its shareholders. The current valuation therefore creates an opportunity for Chevron to gain access to a talented team and attractive assets at a discount.

Chevron made the acquisition of PDC Energy at a time when it is easy to do so given the valuation differences between companies in the industry. This suggests that more acquisitions can be expected in the future if these differences hold.

Most of PDC's assets are located in Weld County, which supports the mining business, providing good growth prospects. PDC also has properties in the Delaware River area. For mining acquisitions, profits are often higher than expected. This is due to technological advances that increase productivity and profitability.

Currently, Chevron is benefiting from favorable industry conditions more than most other companies. This makes Chevron an attractive investment for many investors and analysts. The main risk is that favorable industry conditions may not be sustained for long. Thus, Chevron may benefit from the current valuation differential, but if conditions change, there may be a problem

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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