Don’t Buy Chevron Stock Until the Next Large Dip

[Editor’s note: “After 70% Rebound, It’s Time to Ditch Chevron Stock” was originally published April 6. It has since been updated to reflect the most relevant information available.]

Chevron Stock Has Gone Too Far, Too Fast

Source: Trong Nguyen /

What’s next for Chevron (NYSE:CVX)? Like its major oil company peers, Chevron stock has moved higher in the past two months, as oil prices have rebounded towards $40 per barrel.

But, as shares have bounced back around 75% from their 52-week low ($51.60 per share), are they a buy at today’s prices?

It all depends. If oil’s major rebound continues, shares could continue heading back to past highs (around $120 per share). On the other hand, if energy prices tread water from here, expect shares to drip from their current price level (around $90 per share).

With this in mind, it doesn’t look promising to buy CVX at today’s prices. Why buy now, if you could wait to enter a position on additional pullback?

As the macro outlook remains uncertain for the energy sector, it may be best to sit tight. Today’s crude oil recovery could easily turn on a dime.

Rebounding Energy Prices and Chevron Stock

As coronavirus headwinds enter the rearview mirror, depressed oil prices may soon be behind us as well. With the world slowly “returning to normal,” crude oil demand could continue to head higher.

But that’s not all!  With the IEA (International Energy Agency) predicting oil demand not only to bounce back, but exceed pre-crisis levels, there’s plenty to be hopeful for in the oil patch.

Yet, it’s uncertain whether oil continues to climb well above the breakeven price of Chevron’s more profitable operations. A feared “second wave” of the pandemic could mean prices dip from here.

In short, expect the company to continue playing defense until prices return to prices above $50 a barrel.

Also, rising oil prices may be enough to move the needle for Chevron’s stock. Recently, RBC’s Biraj Borkhataria downgraded shares to the equivalent of “sell.” His rationale? The analyst cited the company’s rich valuation, and expected earnings declines greater than its peers, among other concerns. Despite downgrading the stock, he maintained his prior price target ($100 per share).

Dividend and Valuation

A key question regarding Chevron is the dividend. Even after rallying in the past two months, the company still has a “high yield” dividend. As today’s prices, the yield stands at 5.6%.

Yet, that high yield also demonstrates investors remain fearful of a dividend cut. That’s reasonable, given to what’s happened with the dividends of many of the company’s peers. However, this doesn’t appear to be in the cards. The company’s plans to cut production and expenses free up cash, allowing it to continue its current payout levels.

Chevron’s management knows the importance of maintaining its dividend. It knows many of its shareholders are income investors. If they cut the dividend, these investors will bail, sending shares lower.

Assuming the dividend is safe, shares could see limited downside. Yet, is there a pathway for shares to move higher in the next year?

That’s going to be a challenge. For the stock to rebound back to past highs, oil needs to continue making an epic recovery.

Back in 2018, Chevron posted earnings of $14.9 billion. But that’s back when the average closing price of oil was around $65 a barrel. Oil prices may have to return to such levels in order to move the needle again.

Given today’s oil price trends, that means another 64.5% move higher for that to happen!

Buy CVX on a Dip, But Hold Off for Now

Although the coronavirus is coming to an end, investors may have gotten ahead of themselves bidding up oil stocks like Chevron. With this in mind, it’s reasonable to assume shares will continue to pull back.

Yet, that’s not to say the stock will retest past lows. The company’s recent move to protect the dividend is a positive factor. In a low-interest world, it’s tough to find yield. Income investors may help support the stock’s current price level.

Regarding upside, nothing’s guaranteed. A slow recovery and potential second wave could mean a long-term oil price slump. But given the unpredictability of oil markets, crude oil prices could bounce back to $50 per barrel later this year, moving the needle. However, this is a long-shot catalyst for now.

In short, wait for additional pullback before buying Chevron. With Wall Street pricing in a recovery, shares may not be worthwhile right now.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

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