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A Prudent Pick

05/05/2006 12:00 am EST


John Buckingham

Editor, The Prudent Speculator

John Buckingham should be on any Money Show attendee's must-see list. His Prudent Speculator earns the top rating from Hulbert for total return over the past ten, 15, and 25 years. Here's a sample of the value and growth strategy behind this enviable track record.

"Chevron (CVX NYSE) shares offer one of the most attractive valuations in the integrated oil sector. The shares can be had for nine times trailing-12-month earnings, eight times next-12-month's estimated earnings, 66% of sales, and 2.3 times tangible book value. While arguments exist for the lower valuation, the market seems to be missing some real potential for the stock to move higher.

"What has investors worried are statistics, like those from the interim update the company gave near the end of March, where it was disclosed that international production, accounting for two-thirds of total production, will decline 4% in 2006. In addition, CVX was arguably hit the hardest in the refining segment by the hurricanes of 2005 and its reserve replacement growth, without acquisitions, is minimal.

"Despite these negatives, we think that long-term oriented investors should consider all of the opportunities CVX has beyond the six month window that is the typical time horizon of most 'professionals' on Wall Street. Surging prices of the energy commodities Chevron peddles afforded the opportunity to buy back $3 billion in stock in 2005 and we expect more of the same this year to complement the current 3.1% dividend yield.

"Chevron is truly a global firm, having not-so-long-ago purchased Unocal for $10 per barrel of oil equivalent (meaning it is profitable as long as oil stays above $10 per barrel) and aside from already being accretive to EPS and cash flow, the transaction gave the company a huge presence in Asia, so much so that fully 25% of Chevron's production now takes place there.

"Also, in early March, CVX acquired five leases in Canada covering an area with an estimated 7.5 billion barrels of oil capable of being extracted from the tar sands to go along with the 20% stake the company has in the Royal Dutch Shell-controlled Athabasca Oil Sands Project. Already the largest producer in Angola, Chevron expects production there to ramp 40% over the next three years.

"The company is also in talks with India's Reliance Energy about cooperating on refining and exploration there and is interested in partnering with Saudi Aramco on a multi billion dollar refinery in the Port of Jubail. And this just scratches the surface of the breadth of global projects CVX is working on. Overall, we are buyers up to $64.31 with a liquidity goal and fundamental goal price targets of $129 and $103, respectively."

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