Given the continued fall in oil prices, many investors have found comfort in some of the energy sector’s largest players. And you can’t get much bigger than star performer Chevron (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. The integrated nature and huge size of Chevron allows it to perform well in all sorts of oil and natural gas price environments.
Which is exactly what you want in a period of volatile oil prices. So the attraction to Chevron stock is certainly warranted.
However, CVX isn’t without its faults. Some of those blemishes are pretty bad, and could seriously derail Chevron stock if things don’t exactly go CVX’s way.
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.
Pros of Chevron Stock
Value: Chevron stock is a bargain for investors when it comes down to pure metrics. As oil and natural gas have plunged, so has CVX stock. Since the beginning of the year, Chevron stock has fallen by more than 15%. Expanding out further, CVX is down about 28% over the past year, and now sits at four-year lows. That fall has made Chevron stock ridiculously cheap. CVX shares can be had for a trailing-12-month price-to-earnings ratio just north of 10 — certainly cheap compared to the S&P 500’s 21 P/E. Chevron also trades more cheaply than integrated rivals Exxon Mobil (XOM) and BP (BP).
Refining: One of the best things about being an integrated giant is … well, integration. That means, you have all the components of the energy pie: When oil prices are high, your production operations feast; when they are low, your refining facilities can take advantage of the lower feedstock costs. CVX features numerous facilities as well as a chemicals joint venture with Phillips 66 (PSX) that has feasted on cheap natural gas. All in all, analysts at Barclays predict the major oil companies will beat consensus earnings estimates by an average of 30% due to low oil prices and the strength of refining margins. Chevron should surprise when it finally reports earnings and stem some of the losses from its production arm.
Dividend: When it comes to rewarding investors in the oil patch, CVX is one of the best, courtesy of a rich dividend payout. Today’s $4.28 annualized payout per share equates to a juicy 4.6% dividend yield. And despite the price drop in oil, that generous dividend yield is relatively safe. CVX features one of the lowest debt-to-equity ratios of the major energy stocks sans the AAA-rated XOM. That means it should be able to keep pumping out payments for the time being even though cash flow remains an issue. And when the oil rout first began, Chevron’s management assured that the dividend was a non-starter for cuts from its balance sheet.
Cons of Chevron Stock
Cash Crunch: Chevron’s dividend might be safe, but it’s in spite of its cash flow issues. The last few years have seen CVX spend an awful lot of moola on new projects. In sharp contrast to other majors, Chevron has spent more than its cash flows on new capex projects. The problem is that in order to keep doing this over the longer haul, CVX is either going to have to load up on debt or start selling assets — neither of which is necessarily good. This doesn’t mean that CVX is going the way of the dodo, but that juicy dividend may not look so juicy if the energy firm piles on more debt and/or if the payout increases stall.
Oil Prices: Let’s face facts: CVX is an oil company, so it wants oil prices to be as high as possible. With prices for the fossil fuel once again dropping, Chevron is going to be making a lot less money than it did a year ago. And while CVX is integrated and is somewhat protected by refining operations, Chevron isn’t as tied to those operations as Exxon when it comes to revenue. That really could start to impact its cash flows if we enter a period of depressed prices for a long time.
Poor Current LNG Prospects: One of the biggest catalysts for CVX’s future growth was its big bet on liquefied natural gas. Its massive Gorgon exporting facility in Australia — which cost a staggering $80 billion to build — was designed to become a huge cash flow business for Chevron. As were its other projects on the continent. After years of construction, the Gorgon facility is now ready to begin initial test shipments of LNG — just at the wrong time. Slowing economic growth and an abundance of Middle Eastern gas has created a glut of LNG and crushed prices. While the project has about two-thirds of its output tied to higher prices, the remaining third must be priced at spot. And since its huge size will push a lot of LNG onto the market, that spot price could fall harder, making the Gorgon a cash flow loser for a few years.
Given the pros and cons, I think Chevron stock could be a buy at these levels if only for its cheap price and big, rich dividend yield. Still, the headwinds facing Chevron could impact both of these areas.
Chevron isn’t going away anytime soon. That’s not the risk here. But it may not be such a screaming buy if oil continues to fall hard.
Investors just need to weigh that possibility before pulling the trigger on CVX stock.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities