President-elect Trump’s appointment of Rex Tillerson as Secretary of State may have been really about furthering Exxon Mobil Corporation’s (NYSE:XOM) assets in Russia and strengthening ties with the nation, but the biggest winner of overall higher oil prices may not be XOM stock. Investors may want to trade down the integrated ladder to the No.2 spot. We’re talking about Chevron Corporation (NYSE:CVX).
The last few years haven’t exactly been that fantastic for America’s second-largest integrated energy stock. But for Chevron stock, pro-fossil fuel Trump — with Tillerson as his wingman — could be a major boon for the slightly smaller integrated giant. Already, we’re getting a taste of why.
In the end, Chevron and CVX stock could be the energy stock to own for the next four years.
A Major Reversal of Fortunes at CVX
Lower oil prices made fools of us all. And those fools included even the largest majors like Chevron. Even giants like CVX stock had a hard time turning tricks with oil prices in the sub-$40 per barrel mark. You simply couldn’t drill in many locations at that price and make money on the production. What was worst is that the downturn in oil prices lasted longer than anyone predicted.
With “lower for longer” as the new mantra, analysts — including myself — started to question Chevron’s ability to keep its lucrative dividend going as its cash flows didn’t support its CAPEX needs and shareholder rewards. Things were bad at the integrated energy stock and starting to get worst.
But things began to grind forward in CVX stock’s favor.
Energy prices started to move higher on production cuts across the U.S. as smaller firms were forced to file bankruptcy or stop drilling, the amount of oil in storage begin to drop. Prices moved out from the basement. Those prices kept moving up as OPEC, and other major Non-OPEC nations realize that they couldn’t make any money either with oil prices at those levels.
And then the energy sector’s biggest win happened in November. Donald Trump won the presidency. Trump’s platform was one based on fossil fuels. And his appointment of Tillerson sealed the deal for higher energy prices going forward. Energy security, and the ability for American multinationals to get at that energy, is expected to be a top concern for Tillerson during his reign.
Why CVX Stock Is a Better Oil Pick Than XOM
At first blush, Trump’s pick of Tillerson and pro-energy policies would mean that Exxon would be in the driving seat. But this is once instance where Chevron stock has more to gain from higher oil prices. The reason is simple. CVX is an “oilier” firm.
The vast bulk of Chevron’s production comes from producing crude oil. Significantly more than rival XOM. And while CVX has moved heavily into natural gas production and LNG assets, the name of the name is still pumping out lots and lots of crude oil. So any bump upwards in crude oil prices is directly going to have a more dramatic effect on Chevron’s bottom line than natural gas-focused XOM.
During its last conference call, CVX illustrated that fact. At $52 per barrel, Chevron is now cash flow positive — meaning that its operations produce enough cash to keep the dividend and CAPEX spending going. At $60 per barrel, CVX starts to make money from its operations and at $70 per barrel, more than $25 per barrel is pure, sweet profits.
Higher oil prices only mean more money for Chevron and its investors.