“Chevron, a Dow stock and one of the largest oil companies of the world, courtesy of its acquisitions of Texaco and it’s been around as long as oil companies have been public. Part of the old standard empire…
The oil stocks were at these same levels when oil was in the $40s, going into the $30s. You have to look at industry’s key metrics, the apples to apples and compare the companies based on them. For oil, that means comparing things like production growth. Chevron is expected to grow production 4% this year…It does better than any of its competitors when you look at replacement rate, reserve replacement rate. Its ability to find new oil to make up of what it takes out of the ground every year. 2008 Chevron’s replacement was, go to the web site. Read the presentation. This is amazing. Among the best of the bunch so it can take advantage of the long-term shortage of petroleum. Best product pipeline. The future. Let’s us know that Chevron will have growth in the future. Beautiful balance sheet. Loads of cash. Little debt compared to the industry. It can make an acquisition or it could raise the dividend.
You know what I wanted to do right now, this isn’t just about why you should buy Chevron. It’s a tutorial in how I think that should evaluate stocks. Just like you’d look at a new car by checking under the hood, kicking the tires. We’ve seen the fundamentals. Let’s give the dividend a test drive. Chevron’s got a 3% yield right 3.7%. Yeah, I’d be patient with your buying. Hopefully we’ve got a pullback to $65. Look, I actually wanted it to go lower so we could buy it more. Last five years Chevron’s raised a dividend by an average of 12%. The last 21 years, an average of 7%. Now I don’t expect a big dividend increase this year. Oil prices are still down relative to 2008. But it has the cash to do it. Small boost. Not to mention a tradition, tradition of boosting dividends. You buy Chevron in stages on the way down.” Mad Money 3/25/2009
For the last few weeks, Cramer has made it known that he thinks oil has bottomed and will go higher in the coming months. So far, he has been correct as crude prices have gone from the high $30’s to the low $50’s, and there is still more price appreciation potential for oil as rig counts are way down and economic activity seems to be heating up. However, having a hunch about a macro trend is only part of the stock selection process. On last night’s Mad Money, Cramer laid out his thought process in identifying the best stock to take advantage of this trend. In the case of diversified oil stocks, Cramer loves Chevron (CVX) above all others.
First among his reasons to be excited about Chevron is their production numbers. Chevron is preparing to grow production at 4% in 2009, which shows that Chevron is well positioned to take advantage if oil prices do begin to rise further. Furthermore, the company is able to finance these capital expenditures without putting too much debt on the books. Right now, Chevron’s balance sheet is flush with cash which allows them lots of flexibility to either raise the dividend or possibly make acquisitions. Speaking of dividends, Chevron may not have the awesome dividends of a BP (BP) but they do have a very attractive dividend growth rate, an amazing 12% annual increase in the last 5 years.
Furthermore, oil stocks are still selling at the levels they where when oil was bottoming out in the $30’s. This is an imbalance that doesn’t seem to make sense, and will be rectified when the higher oil prices begin to be translated into earnings and revenue at the end of the quarter. These are just a few of the reasons that Cramer recommends buying Chevron on any dips because it is destined to trend upwards, that is if his marco-view is correct.