It’s earnings season once again, bringing us right in the thick of reports by the major energy stocks. And you can’t get more major than Chevron Corporation (NYSE:CVX).
As one of the largest energy firms in the world, CVX features a multitude of assets across the up- mid- and downstream sectors of the energy industry.
That size and scope has allowed Chevron to perform well in all sorts of oil and natural gas price environments — a good thing, considering we’re in the middle of a huge bust in crude oil prices.
But investors or potential investors in Chevron stock shouldn’t be jumping for joy just yet. Chevron does have a few warts — as seen in its fourth-quarter earnings report. And some of those blemishes are pretty bad.
So, should you buy shares in one of the world’s largest publicly traded oil stocks at current levels? Let’s take a look at some of the pros and cons of CVX.
CVX Pros
Big Dividends: When it comes to rewarding investors in the oil patch, CVX is one of the best, courtesy of a rich dividend payout. For the entire year of 2014, Chevron gave out nearly $7.93 billion in dividends and bought back more than $5 billion worth of its own stock. Today’s $4.28 annualized payout per share equates to a juicy 4% dividend yield. And despite the price drop in oil, that generous dividend yield is relatively safe. CVX continues to mint some hefty cash flows from its stable portfolio of assets — about $32 billion in 2014. That amount of cash more than covers the payout as well as provides some wiggle room for increasing it. As CEO John Watson said during CVX’s conference call, Chevron’s dividend remains the “highest priority for the company’s balance sheet.”
Big LNG Coming Online: One of Chevron’s largest projects is finally scheduled to begin shipping its production. CVX’s Gorgon liquefied natural gas (LNG) exporting facility in Australia is finally going ship its first sale this year. The massive project — which cost more than $80 billion to build — is designed to ship LNG towards markets in energy-hungry Asia. Once operational, the project will churn out hefty cash flows for CVX and help reduce its capex spending. Likewise, its sister Australian LNG project, Wheatstone, will begin shipping in 2016 . All in all, these two projects will mean a new steady source of future profits for CVX’s bottom line.
CVX Is Now a Value Stock: No matter how you cut it and slice it, on pure metrics Chevron stock is a bargain for investors. As oil has plunged, so has CVX. Over the past six months, Chevron stock has fallen by around 17%. That bear market in CVX has left it trading at dirt cheap metrics. The integrated oil giant currently trades for a price-to-earnings ratio of just 10 and price-to-book value of just 1.24. Considering that the S&P 500 is trading for a P/E above historic norms, it’s hard to imagine finding a better deal than Chevron stock right now.
CVX Cons
Tied to Falling Oil Prices: The beauty of a major and massive energy stock like Chevron is the fact that the bulk of its projects are designed to churn out cash flows for a long time. Unfortunately, that makes it very hard to stop producing when things go bad. For example, a typical shale well has a lifespan of one to three years. A smaller shale-focused driller can lay down its rigs in terms of new production and only has to suffer for a year while the old well sputters out. You can’t really do that when you’ve invested a couple billion dollars in a deepwater well in the Gulf of Mexico. CVX is pretty much at the mercy of oil prices during downturns. Revenues and profits will be affected if oil continues to slide.
Lowered CAPEX Spending: One of the big side-effects of lower oil prices has been a huge reduction in capex by the E&P industry. CVX has already pledged to cut its spending by 13% this year, which can be a big problem for a firm of its size. Generally, when E&P firms can’t find oil quickly enough, they’re stuck with aging fields where overall output is declining. For a firm like Chevron, it really takes a huge project to move the needle. In its latest earnings report, CVX barely budged on the production front. Saving the capex cash is prudent in the current low oil price environment; however, if CVX sits too long, it could be hurting later down the line.
The Specter of Recession: One of the reasons why oil is falling in the first place is that demand is dropping in the slowing global economy. Already, some facts have pointed in that direction. From Europe beginning to see old “trouble makers” — like Greece and Italy — poking their heads up again to a huge dip in the labor recovery in the United States, things are starting to get dicey. That doesn’t bode well for CVX stock, or any energy firm for that matter. All in all, lower demand and lower oil prices could last a lot longer than anyone is predicting.
Verdict On CVX Stock
Given the pros and cons of Chevron stock, I’m inclined to believe that the integrated major is a pretty decent buy at these levels. It’s cheap, featuring strong long life assets and juicy dividend. That’s exactly what a long-term investor should be looking for in a blue-chip stock like CVX.
Just keep in mind that some of the headwinds facing Chevron could lead to lower CVX stock prices in the near-term future. Forward-thinking investors could use those dips to snag shares at even cheaper prices.
As of this writing, Aaron Levitt held a position in the Vanguard Energy ETF (VDE), which holds CVX stock.
