Chevron Corporation (NYSE:CVX)’s stock fell on Wednesday when the company announced that its Q3 results (to be released in early November) would show earnings below what it received in the second quarter (when it had reported $3.66 in earnings per share). The oil and gas supermajor- it still has a market capitalization of about $220 billion- told the markets that its oil production had been down in the quarter and that prices had been lower as well.
We’ve already mentioned the $3.66 in EPS that Chevron earned during the second quarter of 2012. This figure was down 5% from the second quarter of last year, reflecting a 9% decline in revenue and higher margins that resulted from successful cost cutting. Over the first half of the year, revenue was down 5% compared to the same period in 2011 but net income was down only 2%; because of a small reduction in shares EPS were down only a penny, from $6.94 to $6.93.
Chevron currently trades at only eight times trailing earnings, but in the third quarter of last year it earned $3.67 per share, and the company’s statement indicates that its results for Q3 2012 were well below that figure. Recent analyst consensus has been for $12.59 in earnings per share for 2013- which implied a forward P/E of 9- but that predates the updated guidance. Since analysts had previously estimated $3.06 in earnings per share for the last quarter, it is possible that Chevron will actually end up beating those expectations and still be on track to achieve the sell-side targets for next year. However, we would guess that will not be the case.
Chevron made our list of the ten most popular energy stocks among hedge funds in the second quarter (see the full rankings). One of these funds, which increased its stake by 4% during the quarter, was Cliff Asness’s AQR Capital Management. AQR owned 1.6 million shares of Chevron at the end of June, which made it the fund’s third largest 13F position by market value at that time (research more of Cliff Asness’s favorite stocks). Adage Capital Management sold shares on net but still reported a position of 2.8 million shares. Adage is managed by Phil Gross and Robert Atchinson, who previously worked at Harvard Management (find other stocks that Adage owns).
Exxon Mobil Corporation (NYSE:XOM), BP plc (NYSE:BP), ConocoPhilips (NYSE:COP), and TOTAL S.A. (NYSE:TOT) make a good peer group for Chevron. These other oil and gas companies also show fairly low earnings multiples; a forward P/E of 9, which is what Chevron has before earnings targets are updated by analysts, is exactly in the middle of the range that these companies form. BP and Total trade at 7 times forward earnings estimates. BP obviously is still dealing with poor sentiment from consumers and investors as a result of the Deepwater Horizon disaster, and also has been seeing lower revenue. It does have a high dividend yield at 4.5% (Chevron’s is 3.1%) for any investors for whom that is a major factor. Total grew its revenue in the second quarter compared to the second quarter of 2011, but its earnings were down 42%. Its dividend yield, at 4.7%, is actually a bit larger than BP’s. Income investors might want to look closely at these stocks and make sure they can stabilize and continue their current dividend payments.
Exxon Mobil and ConocoPhillips have forward P/E multiples of 11 and 10, respectively, and we would guess that once analysts have processed Chevron’s recent news that company will be at that pricing as well if not higher (of course, Exxon Mobil and ConocoPhillips could be encountering similar business conditions). Both of these two peers have been seeing sales fall, though Exxon Mobil saw a substantial increase in earnings last quarter versus a year earlier. ConocoPhillips pays a 4.6% dividend yield, while Exxon Mobil’s is 2.5%.
Chevron’s recent news has not been good, and a number of its peers have similar valuation multiples and pay more generous dividends (though it remains to be seen how the same factors harming Chevron’s business will affect them). Even though Chevron looks cheap, other oil and gas stocks are probably better buys.
