Chevron facing uncertainties

Your Money

June 03, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

What do you think will happen with my shares of Chevron Corp.?

- C.C., via the Internet The second-largest U.S. oil company, created by the 2001 merger of Chevron and Texaco, is expected to continue its long track record of using strong cash flow to reward shareholders.

Its financial results are directly affected by the price of crude oil, which has provided a dramatic boost over the past two years, and its ability to expand international exploration and production. The company operates in oil and gas in more than 180 countries.

Inopportune investment can play an unwanted role in results. Chevron has had to write down $2 billion worth of its holdings in electricity provider Dynegy Inc. To end those problems, it signed an agreement to sell its entire 96.9 million shares of Dynegy in an underwritten public offering.

Shares of Chevron (CVX) are up 12 percent this year after a 29 percent gain last year, an 8 percent increase in 2005, a 21 percent advance in 2004 and a 30 percent jump in 2003. The company increased its quarterly dividend by 11.5 percent, to 58 cents per share, payable June 11 to stockholders of record on May 18.

Earnings increased 18 percent in the first quarter, which was better than expected, with lower oil and gas prices offset by the sale of its Netherlands assets and favorable tax items. Oil prices have since rebounded somewhat from tensions in Iran and Nigeria, which will mean a stronger second quarter for oil companies.

In the U.S., Chevron trails Exxon Mobil Corp. in size, but international competitors BP PLC and Royal Dutch Shell also are larger and have an edge in profitability.

Stock of Chevron receives a consensus analyst rating slightly better than "hold," according to Thomson Financial. That consists of six "strong buys," three "buys," 12 "holds" and two "sells."

Chevron's international projects in Asia, Kazakhstan and off the West African coast offer considerable promise - and risks.

Meanwhile, the Venezuelan government contends that Chevron owes it millions of dollars in income taxes. Also, Chevron has reportedly been in negotiations with federal prosecutors and might make a financial settlement related to allegations of kickbacks paid to Saddam Hussein's government in exchange for Iraqi oil.

Earnings are expected to decline 5 percent this year, compared with the 6 percent drop forecast for the major integrated oil and gas industry. Next year's projected fractional gain is in line with the industrywide estimate. The five-year annualized return of 5 percent compares with 8 percent projected for its peers.

I am concerned about shares of the Ariel Fund. Will they do better in the future?

- R.L., via the Internet

This fund requires a long-range view of the future.

It provides a low-risk means of compounding capital over an extended period for retirement, college and general wealth-building.

For several years, the high-quality, fundamentally sound, value-conscious investments it typically owns haven't been in favor, which has taken a toll on results. It holds no utilities, energy, telecommunications or technology hardware stocks and little software.

The $4.1 billion Ariel Fund (ARGFX) gained 19 percent during the past 12 months and has a three-year annualized return of 13 percent. Both results rank in the lowest one-fifth of mid-cap growth and value funds.

"We recommend this as a strong fund and consider John Rogers Jr., its portfolio manager since 1986 inception, to be a particularly skilled investor," said Todd Trubey, analyst with Morningstar Inc. in Chicago. "It is a fund that over long periods of time will do well, though it could potentially underperform during some periods."

Rogers is the founder of Ariel Capital Management. John Miller, with Ariel since 1989, was named the fund's co-manager late last year. It has 34 stock names and low portfolio turnover. The fund seeks a 40 percent discount in its stock purchases, employing cash-flow analysis and other valuation ratios to compare the price to what it considers the intrinsic value of the business.

"The Ariel Fund is willing to do turnaround plays when a company is improving and will become stronger over time, but is not interested in bad businesses that tend to destroy capital over time," Trubey said.

Financial services comprise about 28 percent of the portfolio and consumer goods, 18 percent.

Other concentrations are industrial materials and media. The largest holdings recently were Hewitt Associates Inc., Markel Corp., Energizer Holdings Inc., Janus Capital Group Inc., Idex Corp., Jones Lang LaSalle Inc., Mohawk Industries Inc., Tribune Co., HCC Insurance Holdings Inc. and Anixter International Inc.

This "no-load" (no sales charge) fund has a $1,000 minimum initial investment and 1.07 percent annual expense ratio.

How long will bankruptcy stay on my record, and how will it affect my ability to get credit and loans?

- S.J., via the Internet

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