Why I Own CVX

Chevron (CVX) is the second largest oil company in the US. They are an integrated oil company which means that they do exploration and extraction, as well as refinement and final sale. The majority of CVX's profits comes from extraction.

I have owned CVX for 9 years and it was been a great investment. I admit I was lucky to start buying it in 2003 when oil prices were coming off historical inflation adjusted lows. Then starting at 2004 oil prices went from less than $30 a barrel to the $80-90 range today. Naturally with a three-fold jump in crude prices come record profits for oil companies. The record oil prices allowed Exxon, the largest oil company, to make record quarterly profits for any US company. Chevron also did extremely well. I didn't expect to make big gains when I first bought them, I simply wanted to have exposure to a large segment of the world economy.

We all know that our world is too dependent on oil and we need to wean ourselves off oil. But the numbers show that we are as dependent as ever. Since the oil crises of the early 80's oil consumption is steady at about 4.5 barrels per person. At current crude prices, that means we spend about $2.5 trillion dollars on crude in a year. I estimate the end product of crude sold is twice that which means we spend $5 trillion dollars a year on oil. Chevron earns $25 billion a year, which is only 0.5% of the world's oil consumption. Furthermore, CVX's business is split half and half between oil and gas. For this reason I feel now is a great time to invest in non-renewable energy. It is a huge market and investors don't give it enough credit I believe because they have this perception that oil will be phased out.

Pessimists out there emphasize that we are at the point of maximum oil consumption due to limited supply. This theory is dubbed "peak oil". I don't really have an opinion on peak oil, but I do know that we are finding oil everyday. It is getting more and more costly, but we are finding it. And at current prices, a lot of new sources of oil will become viable. Maybe we will reach peak oil in 2020, maybe 2030. But right now CVX has a P/E of 9 and it has more than 10 years worth of reserves of oil and natural gas. By 2020 or 2030 I would have extracted plenty of value from my initial investment even if peak oil happens.

My CVX investment has gone up 3x in the last 9 years. In addition to that is 3% dividends, for a total of about 17% annual return. I picked Chevron after reading a Morningstar recommendation, which said that CVX is an overlooked but solid oil company. Of course I am relieved today that I chose CVX and not BP!

I don't worry much about CVX and I won't sell it any time soon. It is something I put in a tax sheltered account and forget about. As I have been actively investing for more than ten years, I have seen cycles. The tough part of investing is the long time horizon, and to experience a true cycle can take a decade or more. Few are ready to give investing that much time for results. I think that is the main reason for the volatility and the poor results of the average retail investor. Oil prices are at a cyclical high, and I caught the cycle at a great time. Oil prices could continue going up for a decade or more. But after that CVX probably will not be able to get such profits and oil prices. Similarly I feel that big out-of-favour techs like Cisco, Intel and Microsoft are experiencing long period of undervaluation from the early 2000's and that's why I am sticking by these tech stocks. Hopefully I am right — about tech — and eventually the cycle will reverse itself.