For Derby Week, It's Chevron by a Nose


As last week wound to a close, Chevron , the second-largest of the U.S.-based major integrated companies after ExxonMobil , told us about its financial and operational progress for the first quarter of this year.

While its net income slid by 4.5%, the company remains a member in excellent standing of the more attractive members of the energy contingent. For the quarter, net income fell to $6.18 billion, or $3.18 per share. While those numbers were below year-ago comparables of $6.47 billion, or $3.29 per share, they handily topped the consensus $3.09 per-share expectation of the analysts who follow the company.

Downstream was down
The lower numbers vis-a-vis a year ago were largely attributable to a reduction in refinery output and the drop in oil prices that affected all members of the group. Production actually climbed very slightly to an average of 2.65 million barrels per day, against 2.63 million daily barrels for the first quarter of 2012.

And while the company's output continued to be hindered somewhat by a shutdown in operations at the company's Frade field in Brazil, it appears that Frade will slowly resume production during the second quarter. Nevertheless, net oil-equivalent production of 664,000 barrels per day was up by 13,000 barrels per day year over year, as projects in the Gulf of Mexico ramped up and output from the Delaware Basin in New Mexico, in which the company bought acreage from Chesapeake Energy last year, began to be felt.

Downstream, total earnings dipped by 13%, as the U.S. unit faltered temporarily on the basis of repairs to the company refinery in Richmond, Calif., the site of a major fire in August of last year. Further, a planned turnaround at a company refinery in Mississippi exacerbated the reduction. With a currency translation boost, the international portion of the downstream segment saw its earnings expand by 64%, despite the prior year's first quarter containing a gain on the sale of the company's fuels and finished lubricants businesses in Spain.

A pair of promising finds
Among Chevron's operating success during the quarter was a promising discovery at the Coronado prospect in the deepwater Gulf of Mexico. The company as operator with a 40% interest in the project, along with ConocoPhillips' 35% stake, encountered 400 feet of net pay at the well, which lies about 190 feet from the Louisiana coast in more than 6,000 feet of water.

Chevron is also one of the largest leaseholders in the Gulf. It's currently constructing its Jack/St. Malo and Big Foot projects, which are south of Coronado and which are expected to come on stream during 2014. It's also appraising its Buckskin and Moccasin discoveries, a pair of plays in the lower tertiary trend to the west of the other finds.

In Australia, where the company and its partners are progressing with the development of the giant Gorgon and Wheatstone LNG projects, Chevron reported its 21st offshore natural gas discovery since mid-2009, Elfin-1. Drilling in the Carnavon Basin, where it is a 50% partner, with ExxonMobil and Royal Dutch Shelleach owning 25%, the company's find occurred more than 100 miles north of Barrow Island in 3,570 feet of water.

Beyond those recent positives, it's worth noting that Chevron management has specified an avowed objective of increasing the company's production by 25% to 3.3 million barrels per day within the next four years. To do so, it intends to spend a minimum of $250 million on each of 50 development projects.

A mano a mano faceoff
Since ConocoPhillipsbecame disintegrated last year, Chevron is not only No. 2 among U.S.-headquartered majors, based on market capitalization, but as a member of a "group" that includes just itself and Exxon, it's also the smallest company in that tiny group. As such, it seems edifying to compare Chevron and ExxonMobil mano a mano, relative to some of their key metrics:



Market Capitalization

$233.2 billion

$391.3 billion

Forward P/E

9.58 times

10.68 times

PEG Ratio (5 year)



Operating Margin



Total Debt/Equity



Forward Annual Dividend Yield



Sources: Yahoo! Finance and TMF calculations

A Foolish takeaway
This is a tough one. But given Chevron's slightly lower valuation, its higher operating margin, and its somewhat higher yield, to say nothing of the "oilier" composition of its reserves, my nod, by a small differential, goes to the California company for now.

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Motley Fool contributor David Smith owns shares of Chesapeake Energy. The Motley Fool recommends Chevron. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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