The backdrop is a grim one for Chevron (NYSE:CVX), as well as for its peers/rivals Exxon Mobil (NYSE:XOM) and even foreign oil giant BP (NYSE:BP). The United States’ levels of oil in storage is soaring again, prodding flashbacks of the situation right before crude’s 2014-2015 meltdown. Just like then, the major drillers and explorers have exercised little restraint.
And, yet, despite the ugly undertow, many oil stocks look too good to pass up — and Chevron stock is arguably the cream of the crop.
Nevertheless, CVX stock would be considerably easier to love right now if it could just get over a key technical hurdle. The fundamentals are already in place.
If, in fact, the current environment is a sign of things to come, it’s easy to understand why so many oil investors are worried. Last week, the nation’s inventory levels of crude oil grew by 10.3 million barrels, reaching a multi-month high of 442.1 million barrels. The speed of the recent swell in stockpiled crude is alarming, not because we’re at the same glut levels seen three years ago, but because we may be en route to a similar situation.
It’s been largely overlooked, but U.S. oil production reached record levels of 11.7 million barrels per day last week — a number that far exceeds the mid-2015 peak of 9.6 million barrels.
For perspective, that’s more oil than Russia or Saudi Arabia are cranking out, as each producer has exercised a level of restraint the U.S. hasn’t.
So far, the impact has been muted. A sizable portion of that production has been shipped to overseas buyers, keeping something of a lid on supply levels that could do serious damage to the oil market.
Time is starting to catch up with the country’s big producers, though. Crude prices are still down 23% from their early October peak, despite a modest bounce this past week. And, given the lag time between opening up new production in the field and putting it into storage, inventories are likely to keep rising before falling again.
It’s not the environment any of these companies were hoping for. Yet, Chevron stock is still a compelling — even if speculative — prospect.
Cream of the Crop
Rewind back to Chevron’s third-quarter report from two weeks ago. Net income grew year over year, from $1.03 to $2.11 per share of Chevron stock. Although revenue of $46.4 billion fell short of estimates, it was still well up from the top line of $34.1 billion produced in the third quarter of last year.
The solid earnings print wasn’t a complete surprise. Crude prices had continued their recovery through Q3, and the company had been navigating the rebound smartly… smarter than Exxon Mobil anyway, according to Wells Fargo analyst Roger Read.
He rates CVX stock at “Outperform” versus a “Market Perform” call on XOM stock, primarily because Chevron’s dividend is better funded than Exxon Mobil’s — and because Chevron demonstrates better fiscal and operational discipline.
Credit Suisse’s William Featherston largely agrees, upgrading Chevron stock to “Outperform” in response to the company’s third-quarter numbers. Featherston wrote: “Chevron continues to execute on its already superior growth outlook, which should translate into better than expected capital efficiencies into 2019 and sets up for continued robust free cash flow.”
Bloomberg’s Liam Denning sees it too. He wrote following the company’s third-quarter report: “While Exxon’s dividend yield of 4 percent is slightly above Chevron’s, the latter’s overall yield including the buybacks comes to 5.2 percent.” Denning went on to say, “It’s only a small edge. But the contrast is quite striking, given large buybacks were Exxon’s calling card for years; and it is now conspicuous by its reluctance to restore them even as its peers have pulled the trigger.”
And, for the record, Denning and Read both had witnessed the bulk of the recent oil price implosion before singing Chevron’s praises. They shrugged them off.
Bottom Line for Chevron Stock
Admittedly, much has changed in just the past couple of weeks. The potential for a true oil glut is greater than it appeared to be as recently as the end of October and though Chevron stock has behaved bullishly since posting its third-quarter earnings, it’s still in a bigger-picture downtrend. It would need to break above $121 (and, really, above $129) to say it’s snapped out of a slightly bearish rut.
With crude inventories on the rise, that would be no easy task.
Still, if an investor had to own an energy name to be well-positioned and diversified across all sectors, Chevron stock certainly looks like the top name in the group to own.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.