Shares of big oil giant Chevron (NYSE:CVX) have collapsed in 2020 on a cocktail of unfavorable developments in the oil market. Year to date, Chevron stock is down over 40%.
It all started in mid-January, when the coronavirus from China started to worry investors. Then, COVID-19 went global over the subsequent six weeks, and what was supposed to be a China-isolated slowdown in oil demand is now a global demand slowdown.
Even further, in early March, OPEC and Russia got in a tit-for-tat, all-out oil price war after failing to agree on production cuts. Now, both of those countries are upping their production outputs, and flooding the global oil market with a ton of supply … at the same time that demand is crashing because of the coronavirus outbreak.
Now, oil prices have fallen off a cliff. As go oil prices, so go big oil stocks, like Chevron. Consequently, the year-to-date plunge in Chevron stock should be no surprise. This is an awful market for oil stocks.
And yet, the contrarian in me sees CVX stock as a compelling “buy the dip” candidate, mostly because shares are too cheap for their own good, oil prices will eventually rebound, and Chevron stock will pay you a fat yield while you wait for that rebound.
Overall, then, it may actually be time to get bullish — not bearish — on Chevron stock.
Chevron Stock Is Dirt Cheap
In plain English, Chevron stock is severely beaten up, oversold and dirt cheap.
As of this writing, Chevron stock trades hands just below $70. That’s the lowest the stock has been in a decade. The current price tag is also about 40% below the stock’s 200-day moving average. That’s a huge divergence. Indeed, 40% is as far below the 200-day moving average the stock has traded … ever.
More than that, the stock’s Relative Strength Index — which is a technical indicator for how overbought or oversold a stock is — sits at 20. That’s also an all-time low, meaning shares are as oversold today as they’ve ever been.
Even further, the stock’s forward earnings multiple is right around 10. That’s matches near decade low valuation levels. The price-to-cash-flow multiple is below 5 — the lowest that multiple has been in a decade. The dividend yield is up around 6.9%, about triple the S&P 500’s dividend yield, and about six-fold the 10-Year Treasury yield. You’d have to go back to the 1980’s to see a yield as high as 7% on the stock.
Big picture, Chevron stock is trading like the company is on its death bed. It has had its lowest price tag in a decade, most oversold conditions ever, cheapest valuation in years and biggest yield in decades.
That’s a perfect contrarian set-up. If Chevron isn’t on its death-bed — and I don’t believe the company is — then the stock could have explosive upside potential from here.
Oil Prices Will Rebound
Chevron isn’t on its death bed for two big reasons.
First, oil prices will rebound. Coronavirus-related demand headwinds won’t stick around forever, because the coronavirus won’t stick around forever. My modeling suggests that — if we continue to practice and enforce strict social distancing — “peak coronavirus” will hit globally around April or May, before subsiding into the summer. Once that virus and related hysteria subsides, the economy will undergo a sharp v-shaped recovery on the back of tons of monetary and fiscal stimulus. Oil demand will follow suit.
At the same time, it’s unlikely that Russia and OPEC sustain a price war forever, as both sides are incentivized to strike a deal sometime soon.
“Saudis and other Middle Eastern producers have their budgetary constraints [and] Russia is starved for cash,” said Jonathan Barratt, chief investment officer of Probis Group. “So the dynamics of all those put together will mean they will come to an agreement somewhere.”
By mid-to-late 2020, rising demand and falling supply should spark an oil price rebound.
Second, Chevron has sufficient liquidity and cash flows to weather a temporary downturn in oil prices, revenues and profits. The company produced $27.3 billion in cash from operations in 2019, while capex is projected to measure somewhere around $20 billion going forward. Thus, there’s a $7 billion delta between 2019 cash flows and projected capex in 2020, which gives Chevron ample wiggle room to absorb an oil price shock and still be cash flow positive.
Bottom Line on Chevron
Chevron will weather the oil price downturn for the next few months, until coronavirus headwinds ease and oil prices rebound in the back-half of 2019. At that point in time, Chevron stock will rebound with tons of firepower.
To be sure, that rebound likely won’t start until the summer or later. But, considering the stock yields nearly 7%, buyers today will get paid to wait for the turnaround to come.
That’s not a bad proposition.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
