Plummeting oil prices have hammered energy stocks hard in recent weeks and many investors are scrambling for safer ground. At times like these, however, the old adage of “buy fear and sell greed” makes sense — particularly for value stocks like Chevron (CVX) that have fallen hard.
With Brent crude falling into the $50 per barrel range, there’s more than enough fear and loathing going around in the energy sector right now — and that’s one reason why CVX is an intriguing oversold energy stock pick.
Oil price volatility often has been the bane of investors’ (and transportation companies’) existence in the post-OPEC age — and the potential for economic disruption has been the rule in recent years rather than the exception. But here are three reasons why CVX stock is still worth a look.
Oil Prices Have Fallen Off a Cliff Before — And Bounced Back
Rising global demand sparked a surge of oil prices in the early 2000s that reached a zenith of nearly $150 per barrel in the summer of 2008. At the start of the financial crisis five short months later, oil prices had crashed into the $30 per barrel range as the Great Recession stifled global oil demand. Oil prices tripled in early 2009 as the recession began to fade and various geopolitical crises threatened to disrupt supply.
But the availability of cheaper shale oil in the U.S. — combined with lower demand in emerging countries – has driven oil prices down from around $100 last summer to about $50 per barrel this week. But oil companies like CVX have dramatically cut back on exploration — and geopolitical turmoil in the Middle East and Ukraine could drive a rebound in oil prices.
Despite Recent Downgrades, Chevron Still Has Value
CVX will next release earnings on Jan. 30 and analysts expect fourth-quarter earnings per share (EPS) to come in at $1.79, significantly lower than the $2.57 EPS CVX reported for the same quarter last year. Chevron last released earnings on Oct. 31, reporting EPS of $2.95 — beating analysts’ expectations by a whopping 43 cents. However, CVX’s revenue of $54.7 million was well short of the $60.6 billion Wall Street expected — slipping 6.5% year-over-year.
But despite a couple of recent analyst downgrades from “buy” to “neutral,” CVX stock is still a solid, quality stock for several reasons. First, CVX’s most recent quarterly earnings managed to beat the Street significantly, even while missing on the top line. CVX also has a comparatively low debt-to-equity ratio of 0.16, and that 4% current dividend yield is hard to beat.
CVX Management, Focus Looks Solid
CEO John Watson is an insider who’s keenly aware of the environment he’s operating in — the likely reason CVX held off on making its 2015 capital spending announcement last month. In an effort to manage geopolitical risk, the company last month decided to scrap a $10 billion shale gas deal with Ukraine from 2013.
Still, CVX is not content to sit on the sidelines in this low oil price climate. Chevron announced this week that it has made a “significant” discovery of oil in its deepwater Gulf of Mexico Anchor prospect well. The discovery is Chevron’s second major find in recent months.
Obviously, there’s a very real chance that CVX shares will shed another 5% or so in the next few weeks if oil prices actually do fall below $40, but the clock is running down on the strategy of simply shorting oil stocks. CVX is a solid energy stock pick that has fallen down, but is well capable of getting back up — while delivering a sweet dividend to income investors.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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