To Buy or Not To Buy

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By Thomas Copeland on November 5, 2014 Market

With oil prices fluctuating since last year, speculations were that oil companies like Chevron (NYSE: CVX) will suffer. However, much to everyone’s surprise, Chevron (NYSE: CVX) latest figures have shown improvement, as compared to their previous results, and have gone against everything that analysts predicted for them. Now the question is how they managed to pull it off, and what points need to be considered when investing into oil enterprises.

One of the biggest point to ponder over is, when oil prices rise, integrated oil companies have cleansing and marketing assets to turn to, for generation of cash, even though their contribution to actual earnings are pretty small. 90% of Chevron (NYSE: CVX)’s earnings comes through its oil and gas production. But the last quarter demonstrated a different scenario. The earning of oil and gas did fall by over $400 million year over year but the company shifted its focus to refining, chemical manufacturing and retail, which as a result helped raise earnings for over $1 billion to $1.39 billion. This was a 25% rise in the quarterly revenue.

This is one advantage; a firm has, when two different business segments work together. When the oil and gas prices rise, one segment enjoys high figure sales while the other suffers, and when the same prices suffer loss the other segment are on fire. Hence, in a wa,y integrated business enjoys an edge over those companies that don’t offer both services. Many oil companies could learn from this and bring it to practice in their firms.

Another point worth noting is that unlike its fellow businesses, Chevron (NYSE: CVX) didn’t convert its revenue into free cash, and instead it was dependent on debt issuance and other namely assets to cater for their capital expenditure, share repurchase and dividends, while other firms like BP, Royal Dutch Shell and ExxonMobil (NYSE:XOM) converted their revenue into cash. Chevron (NYSE: CVX) has many projects in its pipeline, and once they come into play, the company’s cash situation will boom as yet they seem hesitant about where they stand. This might take a few years but the results seem promising.

At this stage, it is a better idea for investors to sit back and be patient with Chevron (NYSE: CVX). The company should be given a chance to come out and prove itself in terms of capital spending and cash flow generation. Chevron (NYSE: CVX), no doubt has fallen behind in the Big Oil race, but its few projects, such as Gorgon and Wheatstone LNG are in the pipeline, and could change their current state. But even that won’t happen immediately, and will take a couple of years. So instead of making any hasty decisions, investors should hold back on jumping to any major conclusions about the purchase the Chevron (NYSE: CVX) stock. Analysts have made speculations that place Chevron (NYSE:CVX) at a stable and high position in a matter of months, but it is better to let it get there first before buying the stocks.