The novel coronavirus is wreaking havoc on the global economy and has fueled a meltdown in oil prices. Additionally, the oil price war between Russia and Saudi Arabia has contributed to the price plunge. Oil and gas exploration stocks have also declined sharply as the crisis seems to be extending beyond just a quarter or two. Chevron Corporation (NYSE:CVX), trading at almost $81, is down 36% from 52-week highs.
I believe that Chevron stock is worth considering at current levels and this column will elaborate on the reasons.
There is a sense of fear in buying energy stocks when I read opinions that oil can plunge to below zero levels as storage space runs out. However, this fear is a potential indication of oil prices bottoming out. As a matter of fact, Brent crude has already witnessed a strong rally.
My relatively positive outlook for oil stems from the point that Russia and Saudi Arabia will soon get back to the negotiation table. Donald Trump has already talked about a potential pact between the two countries. That’s likely sooner as the current scenario is a lose-lose situation for several economies.
Therefore, Chevron stock can be considered for exposure with an underlying view that oil prices will recover sooner than expected. However, a big plunge in any stock or sector is still not advisable.
Strong Fundamentals Make CVX Stock Attractive
A primary condition for selecting stocks in the current scenario is strong credit metrics.
Just as an example, Chesapeake Energy (NYSE:CHK) has worsening credit metrics and might be headed toward bankruptcy. On the other hand, Chevron has strong fundamentals that will help the company navigate the crisis.
Looking into the specifics, for the fiscal year 2019, Chevron reported debt-to-capitalization of 15.8%. Further, in the last 12 months, the company reduced total debt by $7.5 billion. With a low debt-to-capitalization, I don’t see any balance sheet concerns.
In addition, Chevron reported cash and equivalents of $5.7 billion as of December 2019. The company’s operating cash flow was $27.3 billion for the last fiscal year. Even if the OCF declines significantly, the cash buffer will support the company’s plans for FY2020. A low debt ratio also allows the company to leverage to boost liquidity in the near-term.
It’s worth noting that Chevron had earlier announced a capital investment of $20 billion for the year. The company has revised it lower to $16 billion along with suspension of share repurchase program. Importantly, the company has prioritized dividend flow to investors. With a current dividend yield of 6.42%, Chevron stock is attractive for income investors.
From a liquidity perspective, I also want to add that Chevron sold assets worth $2.8 billion in the last year. Sale of non-core assets will help in adding to the liquidity buffer or deleveraging in the coming years as well.
Attractive Long-Term Assets
Companies like Chevron, Exxon (NYSE:XOM) and Occidental Petroleum (NYSE:OXY) are among attractive names from the perspective of low break-even to profitability.
According to S&P Global Market Intelligence, Chevron’s Brent crude oil breakeven price, the price needed to generate cash flow after paying out dividends and announced buybacks, is $55 per barrel.
With the announced suspension of dividends and cost cutting efforts, Chevron is well positioned in a relatively low oil price environment. The company is targeting more than $2 billion in cost and margin improvement and that will boost the EBITDA margin.
The U.S. Energy Information Administration expects Brent to average $43.30 in FY2020 and $55.36 in FY2021. During this period, Chevron is well positioned financially to tackle the challenge of low-priced oil. Further, a possible Russia-Saudi pact would take oil well above these estimates.
Talking about the quality of assets, Chevron expects free cash flow in excess of $4.0 billion annually from the Permian in the long-term. The company’s assets in the Gulf of Mexico and Brazil can also be game changers.
Bottom Line on Chevron Stock
Chevron was planning to return $75 billion to $80 billion to shareholders over the next five years. However, the plans are likely to be tempered in the foreseeable future due to the COVID-19 impact. Beyond the current crisis, the company is well positioned to deliver value to shareholders on a sustained basis.
It’s very likely that Chevron will come out of the crisis with a strong balance sheet. This will give the company ample headroom for leveraging and accelerating production growth. Once oil prices are above $60 in the coming years, Chevron is likely to be a free cash flow machine.
Overall, Chevron stock is worth considering at current levels. Economic uncertainties for the year make gradual accumulation advisable.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
