Chevron (NYSE:CVX) is like an old movie heroine tied to the railroad tracks, hoping Donald Trump will save her.
Over the weekend, Trump brokered a historic agreement between OPEC and other major producers, known as OPEC+. This could take 10 million barrels/day of oil off the market. The aim is to keep from overloading storage and maintain a price that might protect the dividend of companies like Chevron.
Rumors of a deal sent Chevron stock up from $73 per share to $87 by Thursday. Skepticism send it down to $82.57. The shares were due to open April 13 at $85.75. At that price, the dividend yield is 6.1%, extraordinary in a market where long-term U.S. bonds pay barely 1%.
But is Chevron stock good for that dividend?
The Bull Case
Chevron says it is committed to the payout. It was poised to defend it even before the deal was struck.
In early March, with the stock trading near present levels, I called it a speculative buy. I noted a March 3 press release where the company committed to paying shareholders $75-80 billion over the next five years. I suggested the company was liquidating itself, because the plan would not deliver enough capital spending to replace the oil being pumped.
This was in contrast to the plan of Exxon Mobil (NYSE:XOM), which at the time was still pushing to increase production. Since then, Exxon has followed Chevron’s lead, for now, cutting capital spending 30%.
The go0d news is that Chevron doesn’t need nearly as much to pay its dividend as Exxon does. There are just 1.85 billion Chevron shares outstanding. The $1.29 per share dividend costs just $2.4 billion. Operating cash flow in the December quarter was $5.6 billion. There was $5.7 billion of cash on the books.
Chevron is next due to report earnings May 1, with earnings estimated at 76 cents per share. That’s below the dividend, but there is the public commitment, and there is cash.
The Bear Case
The question then becomes how quickly prices rebound and the market goes back to normal.
Storage tanks in the U.S. could be full by mid-May, with nowhere to store it. Already, natural gas associated with oil production is being flared, burned off at the wellhead, at a record pace.
Skeptics believe the cuts agreed to over the weekend only account for half the world’s reduced demand. The International Energy Agency says demand is in free fall. Some traders think demand could be down by 30 Million Barrels/day. That would overflow storage tanks by June.
Traders were trying to keep prices up on April 13. The price for Brent North Sea oil was still at over $31/barrel. For West Texas Intermediate, the primary U.S. grade, it was $22.50. Heavy crude from Louisiana, called Coastal Grade A, was trading at $12.25.
Chevron is also a major refiner, and crack spreads are now near zero. That means Chevron is getting no more money for products coming out of its refineries than it is paying for the oil going in.
The Bottom Line on Chevron Stock
Chevron can pay its dividend in cash for the first two quarters of 2020, but will have trouble getting to 2021 unless oil prices start rising again.
Analysts disagree on whether that will happen.
Right now you’re trading Chevron’s dividend, betting that the shares can hold up through at least the second quarter.
Chevron’s price action says betting on its dividend right now is speculating. You don’t want to be speculating with your retirement.
Dana Blankenhorn has been a financial journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.