Verizon Financial analysis writing part

Chevron Corporation Financial Analysis

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Chevron Corporation

Chevron is ranked as one of the top integrated energy corporations globally. The firm’s achievements are compelled by its people and their deep commitment to the delivery of industry-leading financial results and excellent stockholders value. Chevron explores, produces and transports natural gas and crude oil; refines, markets and distributes transports fuels and lubricants; manufactures and sells petrochemicals and other additives; and develops and deploys technologies that improve value in all aspects of the operations. The firm was incorporated in 1879 as Pacific Coast Oil but was renamed as Chevron Corp. in 1984. Its headquarters are situated in California but has operations in over 180 countries. As at the end of fiscal year 2016, Chevron’s net production on a daily basis was 2.6 million Barrels, with sales and other operating revenues amounting to $110.2 billion. The firm’s proved reserved are about 11.1 billion barrels and total asset base amounted to $ 260.1 billion.

Chevron Corporation SWOT Analysis

· Strengths Analysis of Chevron

Chevron Brand Value: The energy firm is ranked as 63rd position based on the Brand Finance report. The firm’s brand value is about $17.822 billion and is ranked as the 5th largest corporation in the oil industry across the globe.

Complete integration: The oil firm has a complete amalgamation that scopes from the production, refinery to the sale of products. This makes sure the conclusion of the value chain course as the firm’s operations are present in all steps right from locating crude to the sale of the finished products.

Rich Product   Portfolio : Chevron’s holds a massive product portfolio that ranges from Fuels, Chemicals, Lubricants, Additives, Marine, Aviation, and Base oils and Process oils.

Extensive Geographic  Presence: The firm has an extensive geographic presence globally with operations in over 180 countries.

Oil and Natural Gas Stockpile: As at the end of 2016, Chevron Corporation held a total of 11.1 billion barrels of oil and about 30000 BcF of natural gas reserves. At the same time, Chevron held about 49000 productive wells. This massive reserves give the firm an edge to compete effectively in the markets and enhance its high efficiency.

Weaknesses Analysis of Chevron:

Legal Problems: Chevron Corporation has been tangled in several legal proceedings and illegal actions which damage the firm’s brand image. For instance, the firm was fined by Environmental Protection Agency for the violation of laws since the firm had not reported superfluous emissions in New Mexico.

Operational issues: Chevron is presently facing operational problems in Mexico, which might hurt its production and rise the costs connected to repairs.

Opportunities Analysis of Chevron:

Rising  Demand : There is a high likelihood that the demand for natural gas will increase which could mean a big opportunity for the firm to tap into. The present demand in the USA is about 77.4 billion cubic feet daily and is projected to increase to 80 billion cubic feet.

Renewable Energy Markets: Renewable energy sources are the future of the industry. Most energy companies are eyeing this lucrative alternative. Chevron Corp. is already ahead of its peers since it runs a renewable geothermal energy unit in California and New Mexico.

Long-term Contracts: The firm has made long-term viable deals with China’s Huadian Green Energy, for Oronite and other exploration deals. This is expected to offer a strong foothold to the energy firm in the long run.

Threats Analysis of Chevron:

Increased Government Regulations: The Government and other environmental regulations are have become stringent. The problems regarding environmental pollution and global warming present a huge threat for the operations.

Economic  Crisis: The deteriorating oil prices in the global markets led to most countries reducing their oil imports. This had led to huge losses in the oil sector. If this instability in the markets continues, there financials will have be adversely affected.

Natural Causes: This constitutes undesirable natural disasters that destroy pipelines and oil rigs which pose a threat to the firm.

Project Assignment 1: Financial Statement Analysis

The analysis of financial statements constitutes the examination of the relationships amongst the statement values and trends in those values over time. One of the purposes of financial statements analysis is to utilize past performance of companies and predict how the firms will perform at a future date. Another role of analysis is to appraise the performance in a bid to identify problematic areas. Hence, statement analysis is both diagnosis, identifies problems within a firm, and prognosis in that it predicts how firms will perform at a future date.

1. Financial Ratios

1.1 Profitability Ratios

	2016	2015	2014
Return on Assets	-0.19%	1.73%	7.23%
Return on Sales	-0.45%	3.53%	9.60%
Assets-to-Equity	1.79	1.73	1.72
Return on Equity	-0.34%	3.00%	12.41%

Chevronʼs profitability is weak as evidenced by the negative return on assets, return on sales, and return on equity for the fiscal year 2016. Since 2012, the firm’s net income has been on a downward trend which explains the declining trend in ratios. The firm made a net income of $26,179 million in 2012, $19, 241million in 2014, and a net loss of $497 million in 2016. The downward trend in net income is largely attributed to the declining revenues owing to the low commodity prices which reduced Chevron’s earnings significantly. Earnings are dependent largely on the profitability of Chevron’s upstream segment and the main factor that affects the operations for the upstream is the crude oil prices. The prices of crude oil have dropped considerably since 2014, replicating obstinately higher crude oil inventory and production. In 2016, the prices of Brent averaged at a mere $44 for each barrel. This slump in crude oil prices has impacted the firm adversely and is predicted to continue to affect Chevron’s core operations, cash flows, leverage position, capital investment, exploratory initiatives, and overall production. For 2017, the firm needs to reinforce structural reforms to increase the revenues to turnaround its loss position.

On a positive note, Chevron’s costs also reduced due to the firm’s policies to lower costs and enhance net cash flows in a highly competitive operating environment. The net equity and assets also decreased during the period which explains the slight increase in the assets-to-equity ratio. Since 2014, Chevron’s asset portfolio was constant at $ 264,540 million before declining slightly to $260,078 million in 2016 while the equity decreased to 146,722 million from 156,191 million in 2014. The asset base is nearly double the equity base. The slight decline in assets is attributed to the classification of $4,119 of assets held for sale on the firm’s balance sheet. The assets are related to upstream segment’s operations that are expected to be within 12 months.

1.2Efficiency Ratios

	2014	2013	2012
Asset Turnover	0.42	0.49	0.75
A/R Turnover Rate	7.82	10.10	11.98
Inventory Turnover Rate	14.69	14.65	22.28
Fixed Asset Turnover	0.90	0.57	0.48

Chevron’s efficiency rations also reveal low efficiency in the firm’s operations which is largely due to deteriorating revenues. In 2016 Chevron’s revenues decreased by almost half from $ 211,970 million in 2014 to $ $ 114,472 million in 2016. This explains the downward trend in the firm’s asset turnover, accounts receivables, and fixed asset turnover rations. The revenues declined significantly due to the drop in crude oil prices. There was no major change in assets held by Chevron during the same period. The total costs also reduced from 180,768 million to 110,636 million which is a good sign for the firm. As at the end of 2016, the book value of Chevron’s inventory was lesser than the replacement costs by about $2.9 billion. The inventory turnover ratio improved remarkably due the decline in costs.

1.2 Leverage Ratios:

	2016	2015	2014
Debt Ratio	0.44	0.42	0.42
Debt-to-Equity Ratio	0.79	0.73	0.72
Times Interest	-30.93	-18.46	98.14

In 2016, Chevron’s debt ratio increased to 0.44 so it was slightly higher than 2014 since the corporation took more debt to fund the continuing investment programs. There was no significant change in the assets. The debt to equity ratio increased owing to the increase in debt from 94,000 million to 113,356 million and decrease in equity from156191 million to 146,722 million. The reduction in cash generated from revenue has necessitated the firm to seek additional debt funding. The interest coverage ratio which designates the ability of a firm to pay interest on it outstanding debt was lower 2016 in comparison to 2015 and 2014 largely to Chevron’s lower income.

1.3 Liquidity Ratios

	2016	2015	2014
Current Ratio	0.932	1.352	1.323
Working Capital in thousands	(2,166,000)	8,963,000	10,306,000

As at the end of 2016, Chevron’s liquidity is not favorable in that the working capital is a negative value since the total current assets in 2016 29,619 million, was lesser than the current liabilities 31,785 million. The liquidity position has deteriorated in the past three years. This infers that the firm at present cannot settle its short-term obligations with ease. The current ratio for 2016 was unfavorably impacted by inventories valuation method since the inventory for the year were valued using LIFO (last-in, first-out) technique. In the previous years, the firm had maintained a favorable current ration and working capital. The current ratio does not provide adequate liquidity considering its low total leverage position, even after considering the present value of the firm’s operating lease obligations.

1.4 The DuPont decomposition Analysis.

ROE = NI/Equity = NI/Sales *Sales/Assets * Assets/Equity

Year	ROE	Operation Management	Asset Management	Leverage Management
	NI/Equity	NI/Sales	Sales/Assets	Assets/Equity
2014	12.41%	9.60%	0.7537	1.716
2015	3.00%	3.53%	0.4911	1.732
2016	-0.34%	-0.45%	0.4238	1.787

Based on the information above ROE weakened from 12.4 % in 2014 to -0.34%. The negative implies that the firm is making losses and returns for the investors are quite low. This can be evidenced by decline in equity position of the firm. The downward trend is largely attributed to the downward decline in revenues which led to the erosion of the firm’s profitability. Chevron’s leverage has not changed significantly while the efficiency declined owing largely to the decline in sales.

Project Assignment 2: Stock Valuation project

This section highlights the steps that were used in the computation of Chevron’s weighted average cost of capital which will be used to conduct the firm’s valuation. The weighted average cost of capital also known as the discount rate, is utilized when evaluating if a project is viable or not, and in the assessment of the value of assets. The WACC formula shown below does not take into account the Preferred Stock.  The WACC formula = WACC = wdrd(1-t) + wsrs

Step One: The cost of common equity

The technique used to determine Chevron’s cost of equity was the security market line. The CAPM model was used to predict Chevron’s cost of common stock as shown in the equation: ri = rRF + (RPM) bi

· Beta estimation

First, we estimating Beta for Chevron’s stock by collecting data on the Chevron’s and S&P 500 monthly historical prices for the period January 1, 2012 to December 31, 2016. For the analysis, the “adjusted close” prices were used to compute the monthly returns for the same period. Then the monthly returns data was manipulated using regression analysis. The method used to calculate the regression analysis in excel was the charting capability to calculate Chevron’s stock beta as 1.238. Below is a summary of the regression analysis output.

Regression Statistics
Multiple R	0.662711
R Square	0.439185
Adjusted R Square	0.429347
Standard Error	0.042060
Observations	59

ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.079	0.079	44.638	0.000000011
Residual	57	0.101	0.002
Total	58	0.180

	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	-0.005	0.006	-0.841	0.404	-0.016	0.007	-0.016	0.007
X Variable 1	1.238	0.185	6.681	0.000	0.867	1.610	0.867	1.610

· Risk-free rate

The risk free rate that was used in the calculation of Chevron’s cost of equity was the prevailing 30-Year USA treasury bonds yield of 2.76%.

· Market-risk premium

The market risk premium that was used in the calculation of Chevron’s cost of equity was the market monthly returns average return of the S&P500 0.95% multiplied by the number of months in one year to equal 11.43% Inputting these values in the formula rs=rRF+ (Rm-rRf)* beta reveals that the Chevron’s cost of equity is 13.5%.

Step 2: The Capital Structure Weights (wd and ws)

The table is a summary of the weight structure used in the WACC analysis

Market value of equity : market capital
number of shares outstanding	1,892,000,000
Market price as of 1/28/2017	109.44
total market value as of 1/28/2017	207,060,480,000
Book value of debts	82,737,000,000
total value of capital structure	289,797,480,000
Weight of debt	28.55%
weight of equity	71.45%

The formula uses to compute Chevron’s debt weight was wd = Book Value of Debt / [Market Value of Equity + Book Value of Debt]

Chevron’s equity weight was estimated using the market value of equity, the “Market Cap,” which equals the total number of shares outstanding times by the price per share.  

Step 3: the cost of debt rd

Chevron’s cost of debt was estimated at 6.25% using the 20 year Corporate Bonds based on AA- ratings.  

Step 4: Corporate tax rate

The tax rate used was estimated using the historical effective tax rates as shown below. The average tax rate that was in the WACC computation was the highest rate in the past 3yrs.

estimated taxes	2016	2015	2014
Income Before Tax	(2,160,000)	4,842,000	31,202,000
Income Tax Expense	(1,729,000)	132,000	11,892,000
Effective tax rates	80.05%	2.73%	38.11%

Chevron WACC computation is summarized below

Weight of equity	71.45%
Weight of debt	28.55%
cost of equity	13.50%
cost of debt	6.25%
tax rate	38.11%
WACC	10.751%

Project Assignment 3: Stock Valuation project

This section highlights an estimation and justification of Chevron’s intrinsic value and its fundamental price/share of equity.  

3.1 Dividend Growth Model

The firm step was to identify the dividends issued by Chevron for the period 2012 to 2016. Then the annualized dividends were computed as shown below. The returns for the annualized dividend and annual growth so as to determine the average growth of 5.24%.

Year	Annual Dividend	LN(DIV)	Annual Growth
2012	3.51	1.256	11.1%
2013	3.9	1.361	7.9%
2014	4.21	1.437	1.7%
2015	4.280	1.454	0.2%
2016	4.290	1.456	5.24%

Chevron’s stock price using the Dividends growth model is $ 81.904

Dividends growth model
r		10.75%
growth		5.2%
Last dividend		4.290
expected price	81.90493507

3.2 Free Cash Flow Method

 Note that the present value of the free cash flows is the value of Operations 

First, Chevron’s Operations were forecasted as shown below using data from the firm’s 2016 annual income statement

Status Quo	Industry	Chevron	Chevron
Panel A: Inputs	Actual	Actual	Forecast
A1. Operating Ratios	2016	2015	2016	2017	2018	2019	2020	2021
Sales growth rate	10%	15%	-15%	15%	12%	9%	-4%	-4%
COGS (excl. depr.) / Sales	59%	71%	72%	72%	72%	72%	72%	72%
Depreciation / Net PP&E	7%	10%	8%	10%	10%	10%	10%	10%
Other op. exp. / Sales	25%	-1%	1%	1%	1%	1%	1%	1%
Cash / Sales	8%	8%	6%	10%	10%	10%	10%	10%
Acc. rec. / Sales	9%	10%	13%	13%	13%	13%	13%	13%
Inventory / Sales	8%	5%	5%	5%	5%	5%	5%	5%
Other current assets		3%	3%	2.91%	3%	3%	3%	3%
Net PP&E / Sales	65%	154%	179%	72%	72%	72%	72%	72%
Acc. pay. / Sales	17%	16%	19%	20%	20%	20%	20%	20%
Accruals / Sales	2%	0%	0%	0%	0%	0%	0%	0%
Tax rate	35%	1%	-13%	38%	38%	38%	38%	38%

Next, the free cash flows were computed as shown below

B1. Sales Revenues		2016	2017	2018	2019	2020	2021
Net sales		$110,215	$127,001	$142,533	$155,689	$149,512	$143,581
B2. Operating Assets and Operating Liabilities
Cash		$6,988	$12,700	$14,253	$15,569	$14,951	$14,358
Accounts receivable		$14,092	$16,238	$18,224	$19,906	$19,117	$18,358
Inventories		$5,419	$6,218	$6,978	$7,622	$7,320	$7,030
Other current assets		$3,107	$3,698	$4,150	$4,534	$4,354	$4,181
Net PP&E		$197,724	$90,976	$102,102	$111,526	$107,102	$102,853
Accounts payable		$20,945	$25,400	$28,507	$31,138	$29,902	$28,716
Accruals		$0	$0	$0	$0	$0	$0
B3. Operating Income
COGS (excl. depr.)		$79,589	$91,203.53	$102,358	$111,805	$107,370	$103,110
Depreciation		$16,793	$9,541	$10,708	$11,697	$11,233	$10,787
Other operating expenses		$592	$682.16	$766	$836	$803	$771
EBIT		$13,241	$25,574	$28,701	$31,351	$30,107	$28,912
Net operating profit after taxes	$14,997	$15,827	$17,762	$19,402	$18,632	$17,893
B4. Free Cash Flows
Net operating working capital	$5,554	$13,454	$15,100	$16,493	$15,839	$15,211
Total operating capital		$203,278	$104,430	$117,202	$128,020	$122,941	$118,064
FCF = NOPAT – Δ op capital		$21,983	$114,675	$4,991	$8,584	$23,711	$22,770

The additional data used in the Chevron’s valuation was

Target WACC		10.5%	10.5%	10.5%	10.5%	10.5%
Return on invested capital	7.4%	15.2%	15.2%	15.2%	15.2%	15.2%
Growth in FCF			-96%	72.0%	176.2%	-4.0%

The total value of Chevron’s operations is $235,330

Horizon Value:
	=	$150,849
Value of Operations:
	Present value of HV	$91,446
	+ Present value of FCF	$143,884
	Value of operations =	$235,330

The total value of Chevron’s estimated intrinsic stock price is $92.22

		Value of operations	$235,330
		+ ST &long investments	$32,735
		Estimated total intrinsic value	$268,065
		− All debt	$93,577
		− Preferred stock	$0
		Estimated intrinsic value of equity	$174,488
		÷ Number of shares	$1,892
		Estimated intrinsic stock price =	$92.22

Chevron’s stock price is presently valued at $ 116.51. Based on the computations above, the firm’s stock is undervalued so the recommendation is to hold. Using the Dividends growth model and FCF valuation models, the stock price is significantly higher than the estimated prices from the two valuation models. Similarly, the financial analysis also reveals a deteriorating efficiency, liquidity, profitability, and leverage position as at the end of 2016.

References

Berk, J., & DeMarzo, P. (2017). Corporate finance. Harlow: Pearson Education Limited.

Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of corporate finance. New York, NY: McGraw-Hill Education.

Chevron Corporation. (1987). Chevron corporation annual report. San Francisco, CA: Chevron Corp.

Troy, L. (2012). Almanac of business and industrial financial ratios. Chicago, IL: CCH.

Welch, I. (2014). Corporate finance. Los Angeles: Ivo Welch.