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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Chevron has some risky exposure, but not as much as many in sector

Universal Press Syndicate

If you’re looking for an oil stock, check out Chevron (NYSE: CVX), the second-largest oil company in the United States.

It has expertise in deepwater drilling, but little of its production is in the Gulf of Mexico. Chevron outspends its fellow oil giants on alternative energy as a percentage of revenue. It leads the world in geothermal energy production and is the only oil company to have created a legitimate business unit that gets paid to help clients use less energy.

Like all oil companies, Chevron has its warts, but it’s got bright spots, too. Chevron’s biggest opportunity is just plain oil. One thing plaguing most integrated oil companies is that they expanded heavily into refining and natural gas, two business lines with profits suffering from overcapacity. Chevron actually has the lowest refining exposure of all the oil supermajors.

As for risks, aside from standard concerns such as the price of oil and state of the economy, keep an eye on Ecuador. Chevron is involved in a legacy lawsuit there, stemming from toxic sludge that Texaco dumped in the Amazon jungle decades ago. (Chevron acquired Texaco in 2001.) It’s also worth noting how well Chevron partners with state-owned oil companies in the coming years, as its ability to join with oil-rich nations will increasingly determine its profits. (Chevron is a “Motley Fool Income Investor” pick.)

Ask the Fool

Q: What’s “the accrual method”? – G.R., Shenandoah, Iowa

A: It’s an important accounting concept to understand, because with the accrual accounting system, the “revenue” (sales) on a company’s income statement may not have actually been received by the company.

Revenue doesn’t necessarily represent the receipt of cash in a sale. Many companies are required to book sales when goods are shipped or when services are rendered. But others can record sales when cash is received, or in increments as a long-term contract proceeds through stages of completion.

Imagine Keyboard Depot (ticker: QWERTY). With the accrual method, if it has shipped off a thousand typing machines but hasn’t yet been paid for them, those sales still appear on the income statement. The checks in the mail are reported as “accounts receivable” on the balance sheet.

Be wary of companies where receivables are growing faster than sales.

Q: How can I begin researching a company? – P.S., Modesto, Calif.

A: Call and ask for the Investor Relations department, then request an “investor’s package,” which should feature the latest annual and quarterly reports and perhaps some recent press releases, brochures and other tidbits.

Or you can fire up your computer. Most public companies have fairly informative websites that will likely have a nook titled something like “For Investors” or “Investor Information.” Scour the main page looking for that. There you should be able to view recent financial reports, several years of annual reports, press releases and more. You may also find presentations that executives have made, which can be illuminating. Scan the rest of the website, too, to learn of products and news.

You’ll also find info at http://caps.fool.com and http://finance.yahoo.com.

When I first started investing, I bought nine shares of an electronics company for about $19 each. I watched the price rise for three months and then tuned out for the next nine. When I needed the money for an emergency, I sold my shares at $9, losing half my investment in one year. It turns out that six months earlier, the price had hit $40 before dropping. If I’d been paying attention, I could have sold and doubled my money. I stayed out of the stock market for years because I didn’t know what I was doing. I learned about fundamentals, dividends and long-term growth from you, only about 30 years later. – P.K., St. Louis

The Fool responds: It’s easy to see in retrospect exactly what you should have done. But you rarely know when a stock starts a long decline; any drop could be a temporary blip. If you’ve researched a company and have long-term faith in it, don’t let a little volatility spook you, and prepare to be patient. If you don’t know what you’re doing, it’s smart to get out and learn more.