Five weeks ago, I outlined my plans to create a portfolio of 10 companies that all have one thing in common: They provide a basic need or deliver life’s necessities. It’s my contention that basic-needs companies can offer investors stability and growth throughout any market environment thanks to consistent demand, incredible pricing power, and delectable dividends. This portfolio, which I have dubbed the Basic Needs Portfolio, will be pitted against the S&P 500 over a period of three years with the expectation of outperformance for all 10 stocks. I’ll be rolling out a new selection to this portfolio every week for the next five weeks.
You can review my previous four selections here:
Waste Management
Intel
NextEra Energy
MasterCard
Today, I plan to introduce the fifth of 10 selections to the Basic Needs Portfolio: Chevron Corporation (NYSE:CVX).
How it fits with our theme
Credit: Chevron Corporation (NYSE:CVX)
What we often forget is that on top of being a domestic and international juggernaut that supplies the world with much of its energy needs, petroleum has numerous other uses outside of energy. According to Ranken Energy, a 42-gallon barrel of oil makes 19.4 gallons of gasoline. The remaining petroleum is used to make some 6,000 different items, including household products like plastic containers, dishes, and candles, women’s cosmetics, and even the tires on your car, just to name a few. Petroleum is an essential of life, so it only makes sense to include one of the biggest companies involved in drilling for, retrieving, and refining petroleum products in this portfolio of basic needs stocks.
The risk
The three biggest risks that integrated oil and gas companies face are political unrest in overseas markets, imprudent capital expenditures, and a global growth slowdown.
Rebel guard in Libya, March 2011. Source: BRQ Network, Flickr.
Despite operating around the globe, many of Chevron Corporation (NYSE:CVX)’s assets are well-protected from political unrest or violence. The same can’t be said for Italian-based Eni SpA (ADR) (NYSE:E) which saw a good chunk of its oil production come under serious pressure in 2011 because of civil unrest and an eventual regime change in Libya. At the time, 14% of Eni’s daily production – nearly 250,000 barrels – came from Libya and it maintained quite a few other undeveloped assets in the country. Eni SpA (ADR) (NYSE:E)’s prospects have since improved, but other oil and gas companies deal with the similar potential for unrest on a daily basis.
No oil and gas driller is perfect, not even Chevron Corporation (NYSE:CVX), and all have made an imprudent asset investment before. Luckily for Chevron, the company’s diversified global assets provide ample cash flow – an average of $11.4 billion over the past three years – which makes it easy for the company to utilize this cash for drilling activities or improving its refining capacity.
On the other hand, Chesapeake Energy Corporation (NYSE:CHK) got itself in a lot of trouble when natural gas prices sank to a decade-low last year. Chesapeake leveraged itself to the hilt by purchasing natural-gas-heavy assets last decade but was forced to reduce its output when nat-gas prices hit their lows. Chesapeake Energy Corporation (NYSE:CHK) would have actually run into a capital expenditure shortfall in 2013 if it didn’t sell off some of its assets to boost its available cash.
Finally, there’s the threat of a global slowdown which would negatively impact the need for oil, natural gas, and natural gas liquids, and send prices and volume markedly lower. This is a threat that diversity of assets certainly helps abate, but that Chevron Corporation (NYSE:CVX) is unable to completely escape from.
Why Chevron?
Despite the risks mentioned above, I feel Chevron is the strongest and most attractively priced integrated oil and gas company.
Source: Commons.wikimedia.org.
