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Best bonds
2001 update
ChevronTexaco
A year ago, Chevron and Texaco were second-tier oil companies. Their market caps, both around $50 billion, paled next to $100 billion-plus monsters like ExxonMobil and Royal Dutch Petroleum. But following the October merger, ChevronTexaco is playing with the big boys. "If you're undersized in this industry, it gives you a competitive disadvantage," says Rick White of Neuberger Berman Guardian, who counts ChevronTexaco among his top 10 holdings. The company is now the fourth largest oil firm in terms of production and reserves, a top three producer in every market in which it competes, and No. 1 in the high-growth areas of California and the Caspian Sea.
ChevronTexaco remains on track to realize its own targets of nearly $1.2 billion in cost savings from the merger by June, and $1.8 billion by early 2003 -- but the final tally could be even higher. "It's in their interest to low-ball those numbers," says Kevin McCloskey, a portfolio manager at Federated funds, which owns 2.6 million shares. "By the end, the total could be 10 percent to 15 percent higher." Any surprise savings would translate into big money on the bottom line. An additional 10 percent savings, for instance, could translate to a 17[cents] increase in earnings per share, a big boost in a period when industrywide profits are getting smacked by weak oil prices.
As a result of the merger, ChevronTexaco also boasts one of the best balance sheets in its industry. With more than $2 billion in cash and less than $13 billion in long-term debt, its 37 percent return on capital dwarfs the other big oil players by around 15 percentage points. The firm also pays a hefty and growing dividend of 3.3 percent, higher than ExxonMobil and Royal Dutch. "We expect our balance sheet to be even stronger going forward," says CEO David O'Reilly. "We plan to maintain the same dividend policy under any [oil] pricing scenario."
Yet the company hasn't garnered the respect it deserves from Wall Street. With a trailing P/E of 9.7, ChevronTexaco is cheaper than BP (11), ExxonMobil (14.6) and Royal Dutch (12.6). But all that should change over the next year, says Charlie Ober of T. Rowe Price New Era fund, as the company shows the market that "it can perform, achieve the cost savings from the merger and increase its production growth."
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