To absolutely no one’s surprise, oil stocks have largely been an all-or-nothing affair — either you hit it out of the ballpark, or you fall flat on your face. This is especially true for lower-tier industry players. But what about the majors?
As a member of the exclusive “Big Oil” club, Chevron Corporation (CVX) has far superior financials that can better absorb oil market volatility. CVX stock has also held up well in recent months. However, will that be enough of an advantage to sail through choppy waters?
Despite obvious challenges, Chevron stock seems to be catching well-needed breaks. Early in the week, CVX saw a modest rise in its share price following a favorable ruling by the U.S. Supreme Court.
In a lengthy and bitter dispute over its national oil field development project, Ecuador challenged a decision handed down by The Hague’s Permanent Court of Arbitration. At that time, the international body awarded CVX with a $96 million arbitration. However, with the Supreme Court’s decision to not hear Ecuador’s complaint, it by default agreed with the U.S. Court of Appeals for the District of Columbia Circuit, which upheld The Hague’s arbitration.
With that legal obstacle finding closure, CVX can focus on more productive ventures. One exciting development in the oil markets is Mexico’s surprise decision to allow private producers to drill in its territorial waters.
The last time the Mexican government was so accommodating was 75 years ago. As a result, CVX and the world’s biggest oil producers — including fierce rival Exxon Mobil Corporation (XOM) — are lining up to bid on several exploration zones.
Technically, CVX stock is backed by strengths not characteristic of the oil markets at large. The most obvious factor is momentum. Year-to-date, shares are up more than 13%. This beats out large swathes of lesser oil companies, as well as industry-related funds such as United States Oil Fund LP (ETF) (USO) and iPath S&P GSCI Crude Oil Total Return (OIL).
Furthermore, CVX stock is heavily correlated with the movement of the Brent Crude Oil Index.
Click to Enlarge
However, this was a result of CVX stock jumping ahead of Brent in terms of a recovery. Note that CVX hit bottom in August of 2015, whereas the Brent index hit bottom in January of this year. The determined push higher by Chevron stock suggests that — at least for the majors — there’s still room for profitability in this troubled sector.
Fundamentally, one can at least make an argument for a fighting chance for CVX stock. Near the top of the income statement, we see some change in gross margin, but not by much. In the first quarter of fiscal year 2016, Chevron recorded only a 15% reduction in gross margin from the year-ago level. That compares very favorably to the non-majors like Marathon Oil Corporation (MRO), which has seen a 36% reduction on the same metric. The paring of margin loss also helped CVX stock mitigate damage in the bottom line, resulting in a Q1 earnings beat.
With that being said, there’s a lot of ugliness which will pressure Chevron and the entire oil industry. Sales, earnings and cash flow have all been gutted beyond belief. Brent Crude is on a recovery this year, but it’s still taken a massive haircut against earlier averages.
Also, in terms of peer-to-peer comparisons, Chevron is a bit of a laggard. In Q1, revenue fell 32% against the year-ago quarter. This is under the sales performance generated by XOM and international rival Royal Dutch Shell plc (ADR) (RDS.A, RDS.B), which together average a loss of 28%. True, it’s not the biggest discrepancy, but in a deflationary environment, you want as much of the shrinking pie as possible — and CVX stock is getting boxed out in critical areas.
Chevron may do well under the “hungry bear” analogy — it doesn’t matter if you’re the fastest runner, so long as you’re not the slowest.
Obviously, there are many other oil companies that have their feet far closer to the fire than CVX. This “natural” consolidation could be net beneficial to Big Oil.
At the same time, CVX stock investors want to see the company close the gap against its peers. Taken as a whole, Chevron appears to be moving in the right direction.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
