With better-than-expected results coming from British oil giant BP plc (ADR) (NYSE:BP), investors in large international oil companies like Chevron Corporation (NYSE:CVX) are hoping for more good news.
And if CVX doles out that good news this Friday when it reports first-quarter earnings, Chevron stock should finally claw its way out of negative territory in 2015.
As of early trading Wednesday, CVX shares still were slightly in the red for the year to date. But investors holding Chevron stock have seen their value plummet 12% in the past 12 months. And if you’ve held CVX for the past three years, while you’re up just a little more than 7%, that doesn’t look like much compared to the 40% three-year gains in the Dow Jones Industrial Average.
But the lackluster returns in CVX could soon be coming to an end.
Adjusting to the ‘New Normal’
Ahead of Chevron’s Q1 earnings results, which is due out Friday before the open, the San Ramon, California-based company must answer several key questions — not the least of which involves the pace of its cost-cutting measures aimed at boosting profitability. It also would be interesting to hear what management says about exploration projects, given that oil prices have begun to rebound.
For the quarter that ended March 31, Chevron is expected to report earnings of 79 cents per share on revenue of $24.37 billion, marking year-over-year declines of 66% and 54%, respectively. Full-year forecasts — which won’t be reported until 2016 — are just as dour, with earnings of $3.81 per share on sales of $131 billion suggesting declines of 62% and 38% year over year, respectively.
Like most energy companies, Chevron is working to keep its operations above water. For most of 2015, energy companies like CVX have been trying to identify the “new normal” now that they can’t operate on the assumption of $100 per barrel oil prices. Their profits depend on how quickly they can reconfigure their businesses to withstand the 50% drop in crude price from their 2014 peak. That’s apparent in Chevron’s first-quarter estimates.
But even then, Chevron stock still should push higher from here.
High Oil or Low, Chevron Still Wins
That CVX stock is up almost 7% in the past six months is owed at least in part to the assumption that oil prices have seen their worst days. And if that’s the case, Chevron stock, which will pay you nearly 4% in dividends to wait, is one of the best ways to play the recovery.
Why? Purely from a valuation perspective, it’s tough to debate. Take a look at the chart.
Of the large oil majors, CVX stock is cheaply valued, trading at just 11 times trailing earnings — lower than most of its peers, and just a third of the valuation of BP.
Even assuming a slightly higher P/E of 12, where ConocoPhillips (NYSE:COP) trades, CVX stock would be valued today at around $121, or about 8% higher.
At some point, the market will price Chevron stock accordingly, making it one of the best ways to play rebounding oil prices.
And even if oil prices don’t recover well north of $60 per barrel, Chevron’s cash position of $13 billion and another $31 billion in operating cash flow gives it enough firepower to pick off smaller energy companies to grow its revenue.
On the flip side, if Chevron does nothing at all, the company can still operate profitably as its cost-cutting measures de-risk its exposure to higher prices. Either scenario bodes well for CVX stock.
Bottom Line
Assuming the market prices CVX closer to its peers, Chevron stock should at least reach $120 to $125 within the next 12 to 18 months.
And the company’s operational results Friday should serve as a catalyst.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
