Chevron: A Big Value in Big Oil

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Refining, Marketing & Transportation

As of Dec. 31, 2007, Chevron owned 10 refineries and two asphalt plants, and had interests in 12 international refineries, for a total production refining capacity of 2.115 million b/d (50% North America). As of yearend 2007, it had a network of 25,082 retail sites (including equity affiliates) worldwide.

About three-fourths of Chevron's refining capacity is located in areas of the world that are expected to account for about half of the world's growth in energy demand. Many of its refineries are complex, and capable of converting significant volumes of lower-quality heavy and sour crude into a variety of low-sulfur, higher-value, refined petroleum products.

Chemicals

In 2000, Chevron and Phillips Petroleum (Conoco and Phillips Petroleum merged in 2002) combined their chemical operations into a 50/50 joint venture, called Chevron Phillips Chemical (CPChem). By the end of 2007, CPChem owned or had joint ventures in 30 manufacturing facilities and six research and technical centers in Belgium, China, Puerto Rico, Qatar, Saudi Arabia, Singapore, South Korea, and the U.S.

Other

Other businesses include the company's U.S.-based mining company and its power generation business. Chevron has major geothermal operations in Indonesia and the Philippines and is investigating several advanced solar technologies.

Chevron Energy Solutions (CES) provides public institutions and businesses with projects designed to increase energy efficiency and reliability, reduce energy costs, and utilize renewable and alternative power technologies.

VALUATION

Our 12-month target price of 95 per share is derived by blending our net asset valuation into our more heavily weighted discounted cash flow and relative multiple valuations reflecting overall equity market conditions. The result represents an expected enterprise value of 7.5 times our 2009 EBITDA estimate, a discount to Chevron's U.S. supermajor peers, ExxonMobil (XOM) and ConocoPhillips (COP).

CORPORATE GOVERNANCE

We believe Chevron's corporate governance practices are sound, and above average for companies within the S&P 500 and S&P Energy sector. Its board of directors is controlled by a supermajority of independent outsiders (independent outsiders are greater than 75% of the board).

In addition, the nominating and compensation committees are made up solely of independent outside directors; the company has a committee that oversees governance issues, and the committee met in the past year; the full board is elected annually; the CEO serves on the boards of two or fewer other companies; no former CEO of the company serves on the board; the company has governance guidelines that have been publicly disclosed on the company's Web site; the performance of the board is reviewed annually; outside directors meet without the CEO present, and the number of meetings of the outside directors is specified; a board-approved CEO succession plan is in place; and the company conducts performance reviews of individual directors.

However, shareholders do not have cumulative voting rights in director elections, the positions of chairman and CEO are combined, and the board is authorized to increase or decrease the size of the board without shareholder approval.

INVESTMENT RISKS

Risks to our recommendation and target price include geopolitical risk associated with the company's international operations and interests, changes in economic and industry conditions (including commodity price and refining margin volatility), an inability to achieve upstream production growth and cost targets (including the company's success at replacing its reserves through the drill bit), and operational risk from several large development projects.

Analyst Vital follows shares of integrated oil and gas companies for Standard & Poor's Equity Research Services .