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Joliet Herald News: Bribes aside, avoid Chevron

July 6, 2007

D ear Mr. Berko: I don’t have an oil stock in my modest $142,000 portfolio, which contains 17 different issues. I just sold 150 shares of Bank of America (I know you like the stock) because their online banking system program stinks and because they take weeks to clear the out-of-state checks I get from vendors. Please tell me what you think about Chevron because that’s the oil company I’m looking at and would buy 150 shares. But I’m concerned about the size of the fine and the consequences Chevron must deal with because it paid bribes to purchase oil from Iraq in 2001 and 2003. I know I should have bought oil stocks 10 years ago but now is better than never. I did buy Kinder Morgan and Valero when you recommended them in 1997 and still own them with huge profits.

E.H.

Syracuse, N.Y. Dear E.H. : Not to worry. By the time you read this, Chevron Corp. (CVX-$82.18) will already have settled with the U.S. government. Chevron will have paid fines of $30 million because it paid $20 million in hush money between 2000 and 2003 for the privilege of purchasing tens of millions of barrels of Iraqi oil.

A $30 million fine is basically one’s day’s net income or a drop in the barrel for Chevron. El Paso, Mobile and Bay Oil also got their hands slapped but for lesser amounts and those fines won’t make a tinker’s damn worth of difference to their balance sheets or income statements. I’m surprised however, that Kofi Annan, former secretary general of the United Nations who, with family and friends, mulcted $12 billion in cool cash from the Iraq “Oil for Food” program was never fined or asked to return a centime. He left the U.N. when the criticism got hot and retired wealthy as a nabob. Go figure.

Even though the CVX dividend has increased in each of the last 25 years and could continue to do so for the foreseeable future, I’d not own this stock. While the main attraction is its generous and well-covered dividend, which has grown fourfold in the past decade, aficionados seem to think that CVX’s future dividend growth may be niggardly. So the outlook next year and beyond is not too sanguine.

Other than Royal Dutch Shell, CVX has the lowest potential production rate of all its peers. In fact, since Chevron’s merger with Texaco in 2001, production has declined and average of 2.5 percent a year. CVX has been unable to increase its production from North America and the North Sea so management is relying on new oil fields in Kazakhstan and offshore production in West Africa. These are politically sensitive areas where there’s a serious risk to stability and dependability.

Earnings for 2007 will probably decline about 7 percent, to $7.30, and earnings for 2008 and beyond are also expected to fall. While the dividend is expected to grow each year, the annual increases will also be significantly less. At $79-$83, the stock is trading at its all-time high and many observers believe that there’s little (if any) appreciation remaining in the shares. There are 17 analysts who follow CVX: five analysts have a “strong buy” rating, one analyst has a “buy” nine recommend “hold” and there are two “strong sell” ratings.

I suspect there’s about a 10 percent to 12 percent of downside risk to CVX that currently trades at 11 times 2007 earnings. The $2.20 dividend was just raised to $2.32 and yields a modest 2.9 percent. However, some suggest that CVX might increase its dividend a nickel before year’s end.

The suits on Wall Street seem to think that Ashland Oil, Conoco-Phillips, Exxon, Sunoco, Total SA, REPSOL-YPF, Marathon and Petrobas also have limited appeal over the next three to five years. But if it’s an oil company you must have, the suits would suggest that BP, nee British Petroleum, trading at $69.99, and Royal Dutch Shell, trading at $80.33, have significantly better prospects than any of the big issues in the oil patch.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at [email protected].

http://www.suburbanchicagonews.com/heraldnews/business/berko/457480,4_3_JO06_BERKO_S1.article

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