What an impressive company and what a lucrative business model comes with shares of Chevron.
When you see it has increased the quantity of cash being held by nearly 60 percent over last year, you have to not only offer kudos, but you have to wonder why.
Having checked the balance sheet of its bigger competitor Exxon Mobil, I could plainly see that Chevron has more cash on hand. This could be seen by the end of 2011, when Chevron had increased the cash carried on the balance sheet by nearly 13 percent over the previous year.
As of June 30, Chevron was sitting on a $21.46 billion war chest in total cash and had a staggering $10.65 billion in levered free cash flow (trailing 12 months). In comparison, Exxon Mobil had $17.8 billion in total cash and $15.58 billion in levered free cash flow (trailing 12 months).
As recently as Aug. 28, The Wall Street Journal, in a story titled “Chevron Cash Fuels Deal Talk,” reported the investment community has been buzzing about what Chevron is planning to do with all that cash. “Even if Chevron used the money to retire its debt,” the Journal mused, “it would still have about $11 billion left over.”
That should make shareholders of Chevron feel secure with their $3.60-per-year current dividend payout, which equals a payout ratio of only 25 percent. Shareholders would dance a jig and see the shares they hold rise in price if the board of Chevron is planning on using some of the company’s cash for a special, one-time bonus dividend. Yet, so far this is only a wish, a dream and not yet a rumor.
The company has some big expenses, including two projects in Australia to build plants that will convert natural gas into liquid and compressed forms. This project will cost billions of dollars, but even if there are some price overruns Chevron will have plenty of cash left over to make an acquisition or two.
The list of products and services Chevron offers is a veritable treasure trove and places it towards the top of the list of innovative, environmentally reasonable energy companies on the planet.
It could continue to grow organically — yet, according to reports such as the Journal article there are some tempting takeover targets that are reasonably priced considering their holdings and book value.
Two that have been cited are Chesapeake Energy and Hess, both of which have given no hints that they’re up for sale.
As of Monday, Chesapeake Energy had a market cap of a mere $12.57 billion, which makes it affordable for Chevron. Yet, Chevron better not dilly-dally if it’s interested in Chesapeake. I also noticed Monday that when the overall market volume was anemic, Chesapeake had higher-than-normal volume. Then, 15 minutes after the regular trading session ended, Chesapeake shares spiked 4 percent to $20.34.
Is an important announcement pending? Stay tuned.
Hess’ market cap is a heftier $18 billion, but the price-to-book ratio is at 0.90, and the closing price-per-share on Monday was $53.13 while book-value-per-share is $58.75 as of the end of June 2012.
At the end of its last quarter Chesapeake Energy had a similar price-to-book ratio (0.91) and the shares have been trading around 10 percent below book-value-per-share price of $22.37.
Chevron could thrill its investors by using all that extra cash on hand to buy back more shares or increase the dividend. Chevron spent $2.5 billion buying its stock in the first half of 2012 and already increased its dividend 11 percent so far in 2012. That doesn’t mean it can’t increase both the share buyback and dividend when it next announces earnings sometime in October.
With its comfortable cash cushion, Chevron can move forward with its internal growth plans without increasing its debt load and taking on more risk. That’s a prudent, fiscally conservative way to run a global enterprise, and that’s the tradition that has made Chevron shareholders a lot of money over the past few years.
—By TheStreet.com Contributor Marc Courtenay
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Disclosures:
As of the time of publication, Marc Courtenay had no positions in companies mentioned.