Chevron Corp. (CVX) – the No. 2 U.S. oil company and the most-recent topic of Money Morning’s new "Buy, Sell or Hold" feature – said that a hurricane-induced evacuation of its personnel from the Gulf of Mexico should not hamper production.

Chevron on Monday said it was evacuating employees from its Gulf operations in advance of the arrival of Tropical Storm Dolly, which was upgraded to a full-blown hurricane late yesterday (Tuesday). But the evacuation of the Chevron workers hadn’t hampered oil production at that time, and the company didn’t think that it would, said Chevron spokeswoman Qiana Wilson, who declined to quantify how may employees were involved.

With a capacity of about 190,000 barrels of oil per day, Chevron is one of the biggest oil producers in the Gulf of Mexico, according to the Dow Jones Newswires. Other major oil producers reported they were monitoring Dolly on Monday, but hadn’t yet evacuated employees. Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) said it had removed about 185 workers, though also noting the storm would not hamper production, Dow Jones reported.

Tropical Storm Dolly was upgraded to Hurricane Dolly late yesterday afternoon, and was said to have sustained winds of nearly 75 miles per hour, and some further strengthening of the so-called "Category 1" storm was predicted before it hit landfall today (Wednesday), The Associated Press reported. Hurricane: Cause of Uncertainty, But Not a Cause for Concern In my "Buy, Sell or Hold" feature that ran Monday, I wrote that "Hurricanes in the Gulf of Mexico also could cause prices [of both crude oil and oil-company stocks] to change very fast, as well." But I also noted that Chevron’s long-term prospects were outstanding. So let’s take another look at the case I made as I concluded that Chevron’s shares were a "Buy."

The San Ramon, Calif.-based Chevron resulted from the $36 billion merger with longtime nemesis Texaco Inc. back in 2001. Today it’s a broadly based energy firm whose chief business is petroleum exploration and production. Chevron also is involved in natural gas, chemical production (including commodity petrochemicals), and even plastics.

The company is very solid financially. Last year’s sales of nearly $221 billion represented a 5% increase from the $210 billion in sales reported for 2006. And Chevron’s 2007 profits of $18.69 billion represented a 9% jump from its 2006 profits of $17.14 billion. Chevron’s current market value is slightly more than $177 billion.

At yesterday’s closing price of $85.63, Chevron’s shares are 18% below their 12-month high of $104.53, but 12% above their 52-week low of $76.40. The shares are trading at about 9.45 times current earnings and 10.4 times projected profits, and the stock has a dividend yield of more than 3%.

Anatomy of a "Buy:" Chevron

Let me start my analysis by first noting that Chevron reports its earnings on Aug. 1. In general, I don’t like to trade in or out of a stock just ahead of earnings. The market sentiment prior to an earnings release is very important.  In the case of Chevron, we have seen oil and gas prices plummet from record highs in just the last few days.

Several other factors created a backdrop of uncertainty at the time of my original analysis and rating of Chevron’s shares. First, I initially penned this analysis just ahead of the U.S.-Iran nuclear proliferation talks that were scheduled for the just-concluded weekend – a great example of an event that can cause investor sentiment to shift both quickly and drastically, especially when you’re combining Middle East politics in with a sector that’s as volatile as energy. What’s more, as it’s hurricane season in the Gulf of Mexico, I added that as a potential uncertainty "wildcard" for my Chevron analysis – with the report of a new tropical storm/hurricane creating the potential for a major shift in oil futures pricing, or in the outlook for the company’s profits, should a storm form that was strong enough to force an evacuation, or to cause damage to drilling rigs or refineries.

No great controversies emerged from the nuke talks, as we subsequently discovered. But my concerns about hurricanes proved well founded, as the emergence of Tropical Storm/Hurricane Dolly shows. To this point, we’re only saying "Hello, Dolly," and hopefully will bid adieux to this inclement incursion – as the Chevron spokeswoman seems to believe we will.

Chevron’s share price, as we noted a moment ago, is down nearly 20% from its 12-month high. As we all know, banks and other institutional investors have been forced to liquidate huge amounts of assets of all varieties in recent months – ostensibly to raise cash and slash their leverage. This is why, so many times of late, that the market seems illogical, or even contrary in terms of the share-price movements that we see.

This vast liquidation continues to hit the losing sectors – such as the so-called "structured products" that contain subprime mortgages.

But most recently, however, this forced selling has even affected the once-high-flying sectors: Positions in oil and gas, stocks in the steel sector that were hotly traded until very recently, and even integrated oil companies such as Chevron and Exxon Mobil Corp. (XOM) have suffered as a result. Many of these stocks have been liquidated regardless of merit, bringing some down to almost "fire-sale" levels.

Should we look to capitalize on some of these fallen stars? You bet.

But here’s the two-part question that you have to ask yourself:

• When do we buy in?
• And at what price do we make our move?

Chevron is the kind of company that is capable of continuing to post large profits – propelling its share higher from current levels – even if oil-and-gas prices were to decline during the next 36 months. That’s because Chevron’s business is well cushioned, since refining, marketing and chemicals margins would expand dramatically if market "spot" prices were to decline. Also, the company’s production is poised to expand strongly and Chevron uses some selective hedging that works very well in downside oil markets.

Problems to Vault Over

Chevron was recently forced to reduce its second-quarter guidance to Wall Street, essentially due to losses in its refining and marketing segments (where it underwent major maintenance), and because it suffered some hedging losses.

And yet, despite all these "problems," the second quarter will be a record one for Chevron.

Investors also can expect to hear upbeat progress updates on the company’s key new exploration projects, one of which – the Abgami Project in Nigeria – should begin actual production very soon.

While conceding the near-term results may come in below my expectations, let me say that I still prefer Chevron to the other integrated U.S. oil-and-gas producers because of its higher potential reserves, more-aggressive exploration efforts, and because of an intermediate boost in benefits from production increases in its Kazakhstan, North Sea and West Africa projects.
One problem we have to accept is that this quarter’s disappointment in refining and marketing will linger as a blot on the company’s predictability in the memory of Wall Street’s analyst community, which could hold down the price of Chevron’s shares, or even depress them further in the near term. View these depressed share prices as an opportunity: For investors who don’t yet own Chevron stock, the lower-than-warranted share price could give investors the chance to establish a position in this company’s shares.

In the intermediate term, if it starts to look like Congress is going to do what’s needed and set in motion the changes needed to finally permit exploration-and-production operations in offshore U.S. waters, Chevron will be well ahead of the pack.

So buy CVX shares in progressive stages – starting small before and after the Aug. 1 earnings report – and you could see the stock price escalate some 50% from current prices within a year if the scenarios we’ve sketched out for you here unfold as we expect.

[Editor's Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you with his newly created "Shadow Stock Trader" service. To find out how to subscribe, please click here. Marquez's new "Buy, Sell or Hold" feature in Money Morning has so far covered Chevron, Cisco Systems Inc. (CS), ABB Ltd (ADR: ABB) and Cummins Inc. (CMI). We continue to appreciate all the readers that are writing to us, suggesting stocks they'd like to see analyzed.]

News and Related Story Links:

• CNNMoney.com:
  Chevron: Gulf Storm Evacuation Won’t Impact Production.
• Yahoo! News/The Associated Press:
  Dolly Now a Hurricane, Set to Hit Texas Coast.
• MSNBC.com/Reuters:
  Iran: U.S. Presence at Nuclear Talks ‘Positive;’ Bush Administration Decision to Send Top Diplomat is Break With Past Policy.

• Xinhuanet.com:
  Iran Nuclear Talks Register "Insufficient Progress."

• Money Morning Financial Analysis Feature:
  Special Energy Indicator Points Toward Higher Gas Prices – and a Potential 467% Profit Play.

• Bizjournals.com:
  Richmond council OK’s Chevron’s $1B refinery upgrade Richmond council OK’s Chevron’s $1B refinery upgrade.

• Money Morning Financial Analysis Feature:
  Buy, Sell or Hold: Cisco Systems.

• Money Morning Financial Analysis Feature:
  Buy, Sell or Hold: ABB Ltd.
• Money Morning Financial Analysis Feature:
  Buy, Sell or Hold: Cummins Inc.

• TheFreeLibrary.com:
  The Abgami Project in Nigeria.

• The LA Times:
  Chevron, Texaco Agree to Merge in $36-Billion Deal.