Chevron (CVX) isn’t a buy yet, unless you’re a patient, long-term investor or you find a dividend yield of nearly 5% irresistible.
Yes, CVX is up 30% since hitting an Aug. 24 low of $69.58, but everything about Chevron stock in the longer run depends on the price of crude oil. Even the $4.28/share dividend.
Crude hasn’t bottomed yet, and that’s what investors need to watch. It doesn’t matter if you’re looking at light sweet crude, the benchmark U.S. crude, or Brent, the North Sea crude that functions as a global benchmark price.
Both hit fresh 2015 lows on Thursday. Light sweet crude settled Thursday at $34.95 a barrel, down 34.4% for the year, down 67.6% from the June 2014 high and down 76% from its all-time high in the summer of 2008. In fact, light sweet crude hasn’t settled below $35 a barrel since February 2009.
Brent settled at $37.06, down 35.4% for the year and 67.6% since June 2014.
Chevron Is Risky Business
For CVX and, obviously, the entire energy industry, the oil price crash has been excruciatingly painful. Chevron recently announced a 24% cut in its capital spending budget for 2016 to $26.6 billion from $35 billion in 2015. It expects to cut up to 7,000 jobs. The headcount was 64,700 at the end of 2014, its 2014 annual report says.
Revenue in the third quarter was down 37% from a year ago to $34.3 billion. Earnings have slumped so badly — down 63% in the third quarter to $1.09 a share — that earnings in 2015, projected at $3.36 a share, won’t cover the $4.28 dividend.
The Wall Street estimate for 2016 is $3.51, again less than the dividend.
Chevron stock fell 3.1% to $90.54 on Thursday. While CVX is up 14.8% this quarter, it is still down 19.3% for the year and off nearly 32% since hitting an all-time high of $134.85 in July 2014.
What to do as an investor? To invest in Chevron stock has some risk. The company’s strategy is to grit the downturn out, cut jobs and slash spending; but above all, it’s to maintain and grow the dividend.
Holding the dividend at $1.07 a quarter (which works out to $4.28 a year) is CEO John Watson’s “top priority.” CVX has raised the dividend for 28 consecutive years.
All of its Big Oil competitors are doing the same, but a rotten and prolonged pricing environment could put a lot of pressure on management to trim the dividend, even if cash flow is strong. Many investors and analysts get nervous if the dividend is greater than reported earnings.
Chevron generates more than enough cash from operations to pay the dividend — nearly $15 billion in the first nine months of the year. Dividends paid in the first three quarters totaled about $6 billion, according to the CVX third-quarter SEC filing.
But that shows only part of the picture. CVX spent $22 billion on capital expenditures in the first three quarters. To fully fund those investments and pay the dividend, CVX raised $5.4 billion from selling assets. And it borrowed more than $7 billion.
In other words, maintaining the dividend is becoming costly for CVX and could dampen the interest of investors looking at Chevron stock as a vehicle for bold, new investments in energy. But Chevron continues to believe oil prices will rebound in a major way.
Crude Oil Prices Are Anybody’s Guess
Saxo Bank, the Danish investment house, posited $100-a-barrel crude was possible next year if global production falls. (The prediction was part of a list of what it called “10 outrageous predictions”). But remember: There were predictions of $100 crude a year ago. Crude peaked at $61.36 a barrel on June 10.
But the fact is, no one knows. No one expected last year that OPEC would let its members produce as much crude was they wanted — widely seen as a bid by Saudi Arabia to cripple the U.S. fracking drillers. (Add geopolitical realities as well; Saudi Arabia worries all the time about Iran and ISIS.) And the decision was reaffirmed earlier this month.
During the conference call, Watson told analysts Chevron began the year believing crude would hit $70 by 2017.
Futures trading suggests light sweet crude could hit $48 or so at the end of 2017. Brent would be at $50.
Those numbers are suggestions at best and could be affected by terror problems, war, higher interest rates and the potential effects of implementing the changes that came out of the recent accords on climate change designed to reduce carbon emissions are actually implemented.
To be sure, Chevron has considerable strengths — as do all the major oil companies:
- A conservatively managed balance sheet. The ratio of total debt to total debt plus equity was just 18% at the end of the third quarter.
- The probability of considerable borrowing/financing power if CVX decides to make a major acquisition.
- A huge downstream business — refineries and marketing operations around the world. Those businesses are generally very profitable.
The last point explains why Chevron stock is performing relatively well for an energy company. ExxonMobil (XOM) is off 15.7% this year. Royal Dutch Shell (RDS.A) is off 35%. BP (BP) is down 20.4%.
But pure oil-and-gas producers are getting hammered. Anadarko Petroleum (APC) is down 43.4%. Apache (APA) is off about 31.5%. Devon Energy (DVN) is down 52.7%.
The energy slump has hit market averages as well. The declines for Chevron and Exxon have reduced the Dow Jones Industrial Average by about 243 points this year. If CVX and XOM were simply flat on the year, the Dow would be, too. Energy stocks are the biggest drag on the S&P 500 Index, which is down nearly 1% this year.
Nonetheless, Chevron has enough financial strength that it won’t be going away any time soon. It says it will defend the dividend to the teeth. CVX stock has considerable upside if oil prices rise. And so it will reward you — but you have to be patient.
As of this writing, Charley Blaine did not hold a position in any of the aforementioned securities.
