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Chevron: It's Cheap But Doesn't Look Cheap

However, on a sequential basis, upstream profits jumped 8%, helped by a slightly better-than-expected average price per barrel of crude and natural gas liquids in the U.S. of $94. Here, too, Chevron outperformed Exxon and peers ConocoPhillips (COP) and Hess (HES).

For the downstream business, profits in the U.S. fell more than 70% from $459 million last year to $135 million. Here again, higher operating expenses was the major culprit. But Chevron was able to offset this weakness with better profitability in international operations, with profits of $566 million, up 64% year over year.

The more I study Chevron's business, it gets progressively easier to like the stock, even as shares soar higher. But in this sector, growth and profitability hinge on production and exploration, which require significant ongoing capital investments. As seen by the higher expenses seen in the upstream/downstream businesses, management seems committed to growth.

It's easy to look at Chevron's books and see that the company is not lacking in capital. But should oil and gas prices stay lethargic, it's easy to kiss these investments in production and exploration goodbye. To that end, Chevron's current projects, which includes construction on the Gorgon and Wheatstone LNG in Australia, are progressing well. As are other initiaves, including Big Foot deepwater projects in the Gulf of Mexico, which management said are still on track for a 2014 kickoff.

Bottom Line

Exxon Mobil will likely remain the Street's favorite because Exxon is immense. But Chevron is no slouch in areas like returns on capital and production assets. In that regard, given Chevron's production outperformance this quarter along with better profitability, this stock could command a valuation north of $140, especially since Chevron's fiscal 2014 estimates suggest the stock is trading at a P/E that is a full point below Exxon.

Although the Street sometimes cringes at increased capital expenditure budgets, Chevron's prospects are as bright as ever. With improving production growth, this company belongs on the list of the best stocks to own for the next three to five years.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Richard Saintvilus is a private investor with an information technology and engineering background and the founder and producer of the investor Web site Saint's Sense. He has been investing and trading for over 15 years. He employs conservative strategies in assessing equities and appraising value while minimizing downside risk. His decisions are based in part on management, growth prospects, return on equity and price-to-earnings as well as macroeconomic factors. He is an investor who seeks opportunities whether on the long or short side and believes in changing positions as information changes.
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