1. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 1#
FINANCIAL MANAGEMENT - COMPANY VALUATION REPORT
CHEVRON
Chevron Corporation is one of the world's six biggest players in Oil and Gas, Mining
industry; by revenues, it is also one of the largest corporations in the world. The company
headquarters in California, United States and is active in more than 180 countries with
62,000 employees worldwide and daily production of 2.763 million net oil-equivalent barrels
(2010).
PRODUCTS. Besides its core products from oil and gas, Chevron is developing alternative
energy sources, including geothermal, solar, wind, biofuel, fuel cells, photovoltaic, advanced
and hydrogen fuel. Not only having a big profile for products, the company is also engaged
in every aspect of the industries, including exploration and production; refining, marketing
and transport; chemicals manufacturing and sales; and power generation.
STOCKS. Chevron is listed on NYSE as CVX. From 2006 till now, despite the fluctuation
of the world economy and especially the stock market, the company's showed an steadily
stock price increasing from $USD 61.42 to $96.41.
REPORTS. This report analyses the company focusing on the time from June 2010 to June
2012. Indicators used are Dividend Discount Model, Free Cash Flow Model and some
financial ratio benchmarked with the market. Followed the analyses are my
recommendations.
Figure 1. Price and trading volume of Chevron from Jun 2010 - Jun 2012
#

2. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 2#
I.#CHEVRON'S#COST#OF#EQUITY,#RISK#FREE#RATE,#BETA##
&#MARKET#RISK#PREMIUM#
gn.#=#.02.#As#Chevron#is#listed#on#NYSE,#US#market,#we#used#GDP#growth#rate#2.5%#as#
the#normal#growth#rate.##
RFR.#=#.0025.#Risk#free#rate#is#given#as#high#as#TPbond's#yield.##
Rm#=#.1205.#As#benchmark,#annual#return#rate#of#the#market#is#12.046%,#calculation#
showed#in#Annex#1.#The#annual#rate#of#return#of#Chevron#is#higher#than#this,#23.01%,#
this#is#the#first#indicator,#and#first#of#all#this#is#why#Chevron#is#chosen.##
Beta.# From# historical# data,# I# also# calculated# Beta# for# Chevron# and# had# 1.0395,# this#
positive#beta#means#that#the#stock's#returns#generally#follow#the#market's.##
Next,#I#have#Market#risk#premium#equal#to#(Rm#P#RFR)=.1205M.0025=#.1180#
Cost#of#Equity#or#the#required#rate#of#return#Re=#RFR#+#(RFRM#PPremium#).#Beta#=#.1251#
As# mentioned# above,# Chevron's# Return# rate# (23.01%)# is# higher# than# its# Cost# of#
Equity#(12.52%),#investors#have#an#incentive#to#invest#in#this.##
*#Note#to#Cost#of#Equity:#There#is#three#ways#to#calculate#this,#I#chose#Capital Asset
Pricing Model (CAPM)#with#formula#as#above.#
# #
#

3. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 3#
II.#VALUATIONS##
Constant#Growth#Discount#Dividend#Model#(DDM)##
Dividend,#or#Do#=#3.6,#as#given#From#Yahoo#Finance.#This#is#the#total#of#its#quarterly#
dividend#paid;#or#$3.6#for#every#share#annually.#
Given#from#above#we#have:#Re,#the#Cost#of#Equity#as#calculated#above;#gn,#the#normal#
ˆ
growth#rate#to#calculate#Constant#growth#DDM#P# P0 #
ˆ D (1+ gn ) = 3.6(1+ 0.02) = $34.928 #
P0 = 0
rs − gn .1251− 0.02
ˆ
This# P0 #implied# that# the# fair# value# of# Chevron# stock# is# $34,928,# pretty# much# lower#
than#its#current#market#value#($96.41,#June#2012).##
NonMconstant#growth#Dividend#Discount#Model,#or#twoMstage#growth#model#
NI EPS − DividentPerShare 27, 008 13.62 − 3.6
gs = × = × = 0.615% #
TE EPS 122,181 3.6
This# gs# value# implies# that# Chevron's# stock# will# grow# at# rate# 61.5%# in# (personally#
estimated)#3#years#and#then,#theoretically#it#will#grow#constantly#2%#to#infinity.#
At#this#superPgrowth#period,#Chevron#will#price#as#below:#
# Do × (1+ gs )3 × (1+ gn ) &
% (
^
Do × (1+ gs ) Do × (1+ gs )2 Do × (1+ gs )3 $ (R e − gn ) '
P= + 2
+ 3
+ =
1+ R e (1+ R e ) (1+ R e ) (1+ R e )3
#
= 5.1674 + 7.4172 +10.6467 +103.3275 = 126.56
Current#market#value,#$94.41#is#28%#lower#than#this#intrinsic#value,#$126.56#
#

4. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 4#
III.#FREE#CASH#FLOW#MODEL##
The Weighted Average Cost Of Capital (WACC). This is the model where all capital
sources such as long-term debts and its stocks are included, multiplied by its proportional
weight and then all summed up.
Based on bank's prime lending rate in 2012, the U.S, the Rate of Debts is 3.25% and the
Tax Rate (from the company's annual report) = 43%, we have:
WACC = WeightOfDebt × RateOfDebt × (1− TaxRate) + WeightOfEquity × RateOf Return
TL TE #
= × (1− TaxRate) + × RateOf Return = .081
TA TA
Details(of(calculation(attached(in(excel(file(attached(and(Annex.((
(
IV.##RELATIVE#VALUATION#ANALYSIS##WITH#P/E#;##P/BV#,##P/CF##,###P/S#
#
PRICE#TO#EARNINGS#RATIO#(P/E)#
Given:#Current#price#of#share#=P=#$94.41#######EPS=#$13.62#######gn#=#2%#
P/E#Chevron#=#P/EPS(1+gn)=7.22#
#

5. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 5#
This# is# a# simple#
approach:#measuring#the#
price# paid# for# a# share# to#
its# annual# Earnings# Per#
Share.#We#see#that#as#Chevron,#7.22,#is#lightly#lower#than#the#mean#of#industry,#P/E#
=#7.44.#However#compared#to#stock#of#same#range#of#price#like#Apache#($85.96),#EOG#
Resources#($96.38)#or#Exxon#($84.97),#Chevron#has#the#lowest#P/E,#which#means#the#
best#of#all.##
PRICE#to#BOOK#VALUE#(P/BV)#
Book Value of Equity per Share = (Assets - Liabilities)/ Common Stock Outstanding =
62. (Given CSO= 1,966,999 mil)
P/BV= P/BVPS =94.41/62= 1.55, higher as compared to the industry's is 1.25.
As Chevron is an oil company, it has a large amount of tangible assets; its Price to Book
Value is an important indicator to measuring its stock (unlike Software or FMCG
industry, normally with low tangible assets, P/BV might not reflect correctly their values).
With P/BV = 1.55, higher than the mean of industry, it#implied#investors#are#willing#to#
pay#more#for#the#stock,#in#other#words,#they#value#it#more#than#other#stocks.#It#also#
has#another#implication#that#the#investors#expect#their#investment#on#Chevron#stock#
to#create#more#value#than#other#stocks#in#same#industry.
PRICE#TO#CASH#FLOW#RATIO#
This#ratio#is#somewhat#similar#to#P/E,#however#it#doesn't#take#in#to#account#earnings#
that#is#not#actually#received.#It#reflects#the#real#cash#flow#situation#of#the#company.##
#

6. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 6#
Price#to#Cash#Flow#Ratio#per#share=#(NI+Depreciation)/Common#Stock#Outstanding=#
4.75#times##
Compared#to#its#competitor,#Exxon#with#P/CF=1.32#times,#smaller,#we#can#say#that#
Chevron's#current#liabilities#are#covered#by#higher#cash#flow#than#that#of#Exxon.#By#
this# quick# look# at# its# cash# flow# level,# or# its# liquidity,# we# know# more# about# the#
company's#"health".#Based#on#this#we#can#say#that#Chevron#P/CF#is#good.##
PRICE#TO#SALE#RATIO#
P/S= P/(Net Sales/ Common Shares Outstanding) = .776.
The industry's mean P/S is 1.16.
From given formula, this ratio is another way to compare value of stock: Net Sales over
year 2011 of the company is divided by total number of Common shares outstanding.
Sales of Chevron in 2011 increased 23% (from $USD 198,198 Mil to $USD 244,371);
coupled with its low P/S .776, this makes Chevron an attractive investment.
V.#CRITICAL#EVALUATION#
This#table#shows#Chevron#and#Exxon#Mobil#financial#ratio#of#2011.#
#Liquidation.# Current# ratio# of#
Chevron#is#not#as#good#as#that#of#
Exxon,# however# its# quick# ratio# is#
much# better.# This# tells# the#
company# is# capable# of# using# its#
cash# or# nearPcash# to# retire# its#
#

7. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 7#
current#liabilities.#In#short,#this#is#okay.##
Financial#Leverage#Management#
Chevron#debt's#ratio#11.21#is#a#bit#lower#than#that#of#Exxon,#12.08;##which#means#it's#
better.#Its#Debt#to#Equity,#however#higher#(7.8# and# 5.41#respectively).#It's#high#and#
is# consider# not# good.# However# this# ratio# is# not# a# pure# measurement# of# their# debts#
because# it# includes# Operational# liabilities.# Besides,# as# one# of# the# six# biggest# oil#
companies# in# the# world,# Chevron# can# have# this# high# ratio# without# getting# into#
troubles.##
Profitability#
Chevron's#Operating#Profit#margin#is##.42;#lower#than#Exxon#with#.51.#The#company's#
return# on# Investment# is# .71,# also# lower# than# Exxon# with# 1.05.# Thus,# regarding#
profitability#Exxon#is#better#than#Chevron.##
Another#additional#information#is#from#the#Chevron's#website#with#their#profitability#
ratios#from#2007#to#2011.#As#shown#in#table,#the#company#has#managed#to#maintain#
an# increasing# profit.# # After# the# drop# in# year# 2009# with# deep# tail# of# world# financial#
crisis,#Chevron#went#up#and#showed#a#better#performance.##
#
#
#

8. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 8#
In#short,#this#is#the#summary#of#the#company's#evaluation##
#
#
#
VI.#RECOMMENDATION##
As#a#giant#oil#public#company,#Chevron#has#clear#advantages:#its#size#is#huge#and#its#
consideredPinelastic# (in# both# demand# and# supply)# products# and# services.# The#
company#also#shows#its#direction#for#strategic#development#in#the#future:##exploring#
new# energies# beside# oil# and# gas.# It# plans# to# spend# at# least# $2# billion# on# renewable#
power#ventures#and#research#between#2010#and#2013.#In#addition#to#developing#its#
own# technologies,# Chevron# has# cut# its#
energy# use# by# a# third# since# 1992# by#
utilizing# hydrogen# fuel# cells# and# solar#
panels#at#its#facilities.##
After# analyzing# Chevron,# with#
consideration# of# it# industry# setting,# as# an#
investor#I#would#HOLD#the#stock.##
#

9. By#Thien#Huong.#91855K,#June#2012#CMU#Australia# #
# 9#
The#time#to#hold#the#stock#depends#but#based#on#historical#data,#it's#pretty#sure#that#
the#longer#time#of#holding,#the#higher#the#value#of#this#stock#increases.#Thus,#this#can#
be#considered#for#longPterm#investment.##
%#
#
References:#
1. Lecture#Notes#by#professor#TK#Lim##
2. Yahoo#Finance##
3. http://www.chevron.com/#
4. http://www.energybulletin.net/#
5. http://www.investopedia.com/#
#

10. ANNEX%1%'%Cost%of%equity,%Rfr,%Beta%and%Market%Risk%Premium,%Two%Stage%Growth%Model%
Date CHEVRON% Ri Dev. S&P500 Rm Dev. Sum%of%dev
Jun$1,$2010 63.56 0 0 1,030.71 0 0 0
Jul$1,$2010 71.38 0.12303335 0.10385141 1,101.60 0.06877783 0.05873946 0.00610018
Aug$2,$2010 70.03 40.01891286 40.03809480 1,049.33 40.04744916 40.05748754 0.00218998
Sep$1,$2010 76.62 0.09410253 0.07492058 1,141.20 0.08755110 0.07751273 0.00580730
Oct$1,$2010 78.09 0.01918559 0.00000365 1,183.26 0.03685594 0.02681757 0.00000010
Nov$1,$2010 77.2 40.01139711 40.03057905 1,180.55 40.00229028 40.01232865 0.00037700
Dec$1,$2010 87 0.12694301 0.10776106 1,257.64 0.06530007 0.05526170 0.00595506
Jan$3,$2011 90.51 0.04034483 0.02116289 1,286.12 0.02264559 0.01260722 0.00026681
Feb$1,$2011 99.67 0.10120429 0.08202234 1,327.22 0.03195658 0.02191821 0.00179778
Mar$1,$2011 103.26 0.03601886 0.01683692 1,325.83 40.00104730 40.01108567 40.00018665
Apr$1,$2011 105.13 0.01810963 40.00107232 1,363.61 0.02849536 0.01845699 40.00001979
May$2,$2011 101.56 40.03395796 40.05313990 1,345.20 40.01350093 40.02353930 0.00125088
Jun$1,$2011 99.56 40.01969279 40.03887473 1,320.64 40.01825751 40.02829588 0.00109999
Jul$1,$2011 100.7 0.01145038 40.00773156 1,292.28 40.02147444 40.03151281 0.00024364
Aug$1,$2011 96.45 40.04220457 40.06138651 1,218.89 40.05679110 40.06682947 0.00410243
Sep$1,$2011 90.35 40.06324520 40.08242715 1,131.42 40.07176201 40.08180038 0.00674257
Oct$3,$2011 102.51 0.13458771 0.11540577 1,253.30 0.10772304 0.09768467 0.01127337
Nov$1,$2011 101.13 40.01346210 40.03264404 1,246.96 40.00505865 40.01509702 0.00049283
Dec$1,$2011 104.65 0.03480668 0.01562474 1,257.60 0.00853275 40.00150562 40.00002352
Jan$3,$2012 101.42 40.03086479 40.05004673 1,312.41 0.04358302 0.03354464 40.00167880
Feb$1,$2012 108.15 0.06635772 0.04717578 1,365.68 0.04058945 0.03055108 0.00144127
Mar$1,$2012 106.25 40.01756819 40.03675013 1,408.47 0.03133238 0.02129400 40.00078256
Apr$2,$2012 105.61 40.00602353 40.02520547 1,397.91 40.00749750 40.01753587 0.00044200
May$1,$2012 98.31 40.06912224 40.08830418 1,310.33 40.06265067 40.07268904 0.00641875
Jun$1,$2012 96.41 40.01932662 40.03850856 1,278.04 40.02464265 40.03468102 0.00133552
Mthly Av%Ri%24m 0.01918194 Mthly Av%Rm%24 0.010038 Cov 0.002277
SD%24m 0.06023123 SDm%24 0.046800 Beta 1.039585
Annual%Ri%24m 0.23018331 Annual%Rm%24 0.1205
EPS 13.62
Divident$&$Yeild,$Do$= 3.6
Risk$Free$Rate$ 0.0025
Equity 122,181
Market$risk$premium$$$$$$$(Annual$Rm$4$Rfr)$ 0.1180
Required$Rate$of$return$$$$Re$=$rfr$+(Annual$Rm4Rfr)beta 0.1251 Re
Normal$growth$rate$ 0.02 %
Constant$Growth$DDM$$$$$$$$Po=[Do(1+g$normal)]/Re4g$normal 34.928 USD
gs=Self$Sustainable$growth$SSG$=$RR*$ROE$=$(Net$income/Total$Equity)$*$(EPS$4$Div)/EPS$
0.6150 %
# Do × (1+ gs )3 × (1+ gn ) &
% (
^
D × (1+ gs ) Do × (1+ gs )2 Do × (1+ gs )3 $ (R e − gn ) '
P= o + + + =
1+ R e (1+ R e )2 (1+ R e )3 (1+ R e )3
= 5.1674 + 7.4172 +10.6467 +103.3275 = 126.56
P^^= 126.56 USD
%

11. ANNEX 2 - Free Cash Flow Model Chevron(IS(&(BS( 2,011 2,010 %
Sales' 244,371 198,198 23.30%
Rate'of'Debt' 3.25%
Part(1(Key(Imputs Operating'Cost' 193,161 159,810 20.87%
Milion&of&dollars& Forecasted(Years Operating'Capital' 25,800 24,258 6.36%
2012 2013 2014 2015 2016 Total'Operating'Capital' 259,232 231,625 11.92%
Sales'Growth'Rate 23% 25% 25% 25% 25% Total'Liabilities'='Debts' 87,293 78,958 10.56%
Operating'costs'as'%'of'sales 79% 79% 79% 79% 79% Total'Assets' 209,474 184,769 13.37%
Growth'in'operating'capital 6% 6% 6% 6% 6% Net'Income' 27,008 19,136 41.14%
Depreciation'as'%'of'Operating'capital 50% 50% 50% 50% 50% Depreciation' 12,911 13,063 L1.16%
Tax'Rate 43% 43% 43% 43% 43% Curren'Assets' 53,234 48,841 8.99%
Wacc 0.081 Accrued'Liabilities' 5,287 5,324 L0.69%
Long'Run'FCF'growth,'Gs 2% 2% 2% 2% 2% Payables' 22,147 19,259 15.00%
PPE' 233,432 207,367 12.57%
WACC 0.081 Total'Equity' 122,181 105,811 15.47%
Part(2.(Forecast(of(CashFlows(During(Period(of(Nonconstant(Growth Re 0.12513
Depreciation/Operating:
7% Historical' Forecasted(Years
WACC$=$(Total$liabilities/Total$Asset)*$(Rate$of$Debt%)$*$(18$Tax$rate)$+$(Total$
2011 2012 2013 2014 2015 2016 Equity/Total$Asset)*$Re$$%
Sales 244,371 301,301 376,626 470,782 588,478 735,597 Estimated'based'on'Part1'
''''Operating'Costs 193,161 238,161 297,701 372,126 465,157 581,447
''''Depreciation 12,911 15,919 19,898 24,873 31,091 38,864
EBIT 38,299 47,221 59,027 73,783 92,229 115,286 Earning'before'interest'and'tax'
NOPAT'='EBIT'x'(1LT) 21,830 26,916 33,645 42,056 52,571 65,713 Net'operating'profit''after'tax'
Total'Operating'Capital' 259,232 275,711 293,237 311,877 331,702 352,787 (Cash,'Marketable'Securities,'Account'receivable,'Inventories)'L'Liabilities'and'Payables'
Net'New'Operating'Capital' 27,607 16,479 17,526 18,640 19,825 21,085
Free'Cash'Flow,'FCF L5,777 10,438 16,119 23,416 32,746 44,628 NOPAT'L'Net'new'operating'capital
P.V.'of'FCF's' 0 9,658 13,802 18,552 24,006 30,274 FCFL(1'+'WACC)'

12. Part%3.%Terminal%Value%and%Intrinsic%value%Estimation
Estimated)Value)at)the)Horizon,)2016
Free$Cash$Flow$(2016) 45,521 FCF$(2017)$*1.02
Terminal$Value$at$2016,$TV 735,163 FCF$/$($WACC$C$g$normal)$
PV$of$the$2016$TV 498,709 Terminal$Value$(TV)$/$(1$+$WACC)$^5
Calculation)of)firm's)intrinsic)Value
Sum$of$PV's$of$FCF's,$2012$C$2016 96,292 Sum$of$5$years$
PV$of$2016$TV 498,709 Calculated)above)
Total$corporate$value 595,002 Sum$of$2$previous$lines$
Less:$Market$value$of$debt$and$pfd 87,293 Sum$of$Debt$cua$2011$
Intrinsic$value$of$common$equity 507,709 $Mil) Total$corporate$value$C$Longterm$debt$2011
Shares$Oustanding 1,966,999 Thousand)
Intrinsic%Value%Per%Share 258 USD Intrinsic$value$/$Number$of$Outstanding$