Chevron: Is Now The Time to Buy?

Mind Over Markets
3/21/2019
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Chevron: Is Now The
Time to Buy?


John Persinos

Trying to make sense of the volatile oil and gas sector? For starters, turn off your television. The yapping of energy analysts on TV doesn't amount to a hill of beans.

Many of these so-called pundits don't reveal their own self-interest. An analyst who's expressing a bearish opinion on oil prices, for example, might neglect to mention that his or her trading firm is going short on crude oil futures. How convenient.

More than ever before, oil prices are fluctuating with the ebb and flow of investor passions.

Oil and gas prices are rising but we've been down this road before. Efforts among oil producers for a lasting reduction in the oil glut could evaporate again.

You need to pinpoint the energy stocks with robust balance sheets, lean operations and major untapped production capacity. If oversupply worsens or the economy slows, energy stocks with weak fundamentals will get clobbered.

One low-debt energy company with vast, diversified assets is Chevron (NYSE: CVX), an oil and gas "super major" that's poised to benefit from rising energy prices. But what if the energy rally doesn't last? Oil and gas prices have been extremely volatile and they could head south again.

Let's see if Chevron is a worthy energy play in 2019, with the resilience to weather the turbulence that probably lies ahead.

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What Is Chevron?

With a market cap of $236.9 billion, Chevron engages in energy, chemicals, and petroleum operations around the world. The company operates in two segments, Upstream and Downstream. The Upstream segment explores, develops, produces, and transports crude oil and natural gas.

The Downstream segment refines crude oil into petroleum products; markets crude oil and refined products; transports crude oil and refined products; and manufactures and markets commodity petrochemicals, fuel and lubricant additives, as well as plastics for industrial uses.

Chevron is a successor company to John D. Rockefeller's Standard Oil Company. In 1911, the U.S. Supreme Court ruled that federal antitrust law required Standard Oil to be broken into smaller, independent companies. Chevron is one of the "Baby Standards" that still exists. The company is headquartered in San Ramon, California.

The video provides a quick summary of Chevron's storied history.

How Has Chevron Stock Performed?

What Is Chevron's Stock History?

  • Over the past 12 months, CVX has gained 8.9% whereas the S&P 500 has gained 4.2%.
  • Over the past two years, CVX has gained 15.4% whereas the S&P 500 has gained 20.8%.
  • Over the past five years, CVX has gained 5.2%, the S&P 500 has gained 52.4%, and the benchmark fund Vanguard Energy Fund Investor (VGENX) has lost 27.3%.

How Has Chevron Performed In 2017/2018?

  • In 2017, CVX gained 6.2% and the S&P 500 gained 19.4%.
  • In 2018, CVX lost 15.3% and the S&P 500 lost 7.5%.

Who Are Chevron's Rivals?

Exxon Mobil (NYSE: XOM)

Exxon Mobil is the result of a merger of Exxon and Mobil in 1999. The company operates through upstream, downstream, and chemical divisions. XOM manufactures, trades, transports, and sells crude oil, petroleum products, and other specialty products.

With a market cap of $344.3 billion, Exxon Mobil is the largest direct descendant of Rockefeller's Standard Oil Company. As of 2018, Exxon Mobil ranked second in the Fortune 500 list of the largest U.S. corporations by total revenue ($290.21 billion).

Read This Story: Our Exxon Mobil Stock Prediction in 2019 (Buy or Sell?)

BP (NYSE: BP)

BP is a global integrated super major oil and gas company, with upstream and downstream operations.

Read This Story: 7 Point BP Dividend 2019 Guide (*Expert Analysis*)

With a market cap of $146.4 billion, BP is involved in exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading. It also operates renewable energy interests in biofuels and wind power.

The company's biggest division is U.S.-based BP America. In Russia, BP owns a nearly 20% stake in Rosneft, the world's largest publicly traded oil and gas company by production.

Royal Dutch Shell (NYSE: RDS-A)

Royal Dutch Shell (market cap: $287.7 billion) explores for, and extracts crude oil, natural gas, and natural gas liquids; markets and transports oil and gas; produces gas-to-liquids fuels and other products; and operates upstream and midstream infrastructure necessary to deliver gas to market.

Read This Story: Top 3 Cheapest Oil Stocks to Buy Now? (2019 Review)

Over the past two years, the company sold over 50 properties in 25 countries. Management intends to focus operations on its most profitable operations.

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Will Chevron Go Up In 2019 (Should You Buy)?

Chevron stands out for its diversification. The giant energy producer boasts a mix of assets, including liquefied natural gas (LNG), deepwater fields spread around the world, shale plays in North America, and downstream activities such as refining and retailing. The latter downstream assets confer high margins and help buffer the company from oil price gyrations.

Chevron's productive capacity is well diversified and vast, extending through North America, the Asia-Pacific, Africa, Latin America, Europe and Eurasia.

Chevron has been methodically pruning its portfolio, by sloughing off non-performing assets, cutting expenses and emphasizing its most profitable operations.

Chevron has kept its profits buoyant by wrangling the debt beast to the ground. That's in stark contrast to many of its debt-ridden peers. Chevron's management has been judiciously trimming CVX's portfolio of assets to weed out the under-performing holdings.

Chevron is well-positioned to profit from the energy patch's upward momentum. The price of oil swooned in the fourth quarter of 2018 as investors worried about slowing global growth and a persistent glut of crude. The stock market followed suit. But oil demand should pick up again and provide a sustainable tailwind for oil prices, especially in emerging markets as rising middle classes buy more cars and other oil-guzzling amenities.

Indeed, after a dismal performance in the latter part of 2018, crude has rebounded so far in 2019. The per barrel prices of U.S. benchmark West Texas Intermediate (WTI) and international benchmark Brent North Sea crude have been on the upswing, with WTI currently hovering at about $60 per barrel and Brent at about $68/bbl.

Regardless, oil price volatility won't go away anytime soon. Headline risk abounds in 2019 and history shows that unexpected geopolitical crises or supply disruptions serve as immediate catalysts for crude price movement.

In today's unpredictable investment climate, your smartest strategy is to look for energy stocks with the lowest ratios of long-term debt-to-equity. They're less vulnerable to wild oil price swings and they'll grow the fastest if the oil rebound has legs.

Despite Chevron's strong stock performance, CVX is among the cheapest oil stocks and has a leg up on Exxon Mobil in terms of positioning.

Chevron has spent considerable sums to upgrade and maintain operations over the years, while Exxon Mobil is a bit behind the curve. For 2019, Chevron has announced $20 billion in capital expenditures (capex), its first capex boost in four years.

Among Chevron biggest investments is a $4.3 billion project in the Tengiz Field in western Kazakhstan. Chevron also is scoping out new reserves off the coasts of Brazil and West Africa.

Chevron boasts a rock-solid balance sheet, with over $9.4 billion in cash (most recent quarter). CVX's total debt-to-equity currently stands at 0.18, far below the integrated energy industry's average debt-to-equity ratio of 25.36.

CVX's forward price-to-earnings ratio (FPE) is reasonable at 15.1, a modest premium to the FPEs of chief rivals XOM (14.6), BP (10.8), and Royal Dutch Shell (10.2), but below that of the S&P 500 (17.5). CVX's healthy dividend yield of 3.78% is icing on the cake.

Will Chevron Go Down In 2019 (Should You Sell)?

Here's a quick look at the bear case.

Energy prices have been rising again, but the global oil glut shows resilience and most economists are calling for an economic downturn in 2019, or 2020 at the latest. Prices could easily tumble again, especially in a volatile political environment in which bad news occurs on a daily basis.

With oil prices seemingly on the ascendancy again, many investors looking for growth opportunities are eager to jump back into energy stocks. Problem is, you need to be judicious or you could get burned.

Oil prices may have finally recovered, but oversupply still exists and global growth remains uncertain. Oil prices have been choppy and they could lose steam, punishing stocks such as Chevron.

Overall Chevron Forecast And Prediction For 2019

I'm siding with the bulls on Chevron. Despite the oil and gas sector's roller-coaster ride in recent months, this energy giant enjoys several long-term tailwinds.

The U.S. Energy Information Administration projects that the U.S. will become a net energy exporter in 2020 as a result of large increases in crude oil, natural gas, and natural gas plant liquids production.

As Chevron streamlines, reduces debt and cuts expenses, it's simultaneously plowing the freed-up capital into more productive ventures with higher margins. By keeping its powder dry during the long decline in oil prices, the super major is now in superb position to exploit the energy price rebound.

One of Chevron's strongest advantages is diversification that provides a multiple revenue stream. Chevron's stable revenue and earnings from downstream assets help cushion the company from oil price volatility.

The average analyst expectation is for Chevron to generate year-over-year earnings growth next year of 17.8%. Over the next five years, earnings growth is expected to reach 37.7%, on an annualized basis.

Every portfolio should have exposure to the energy sector; Chevron is a quality pick for both growth and income.

John Persinos is the managing editor of Investing Daily.

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