This week, crude oil got a couple boosts. First, there was some weakness in the dollar. Then both Goldman Sachs and Morgan Stanley published bullish reports on crude oil.
With the excitement, the price of crude rose nearly 2%, a change of pace after a recent correction. In fact, Goldman and Morgan think the price can jump more than 20% over the near term.
If so, it should be good for shareholders of Chevron (NYSE:CVX), who already have had a pretty good 12 months. Over the past year, the stock is up about 46%, giving the company a market cap of $207 billion.
But what about the next year? Is Chevron still a good investment? Here’s a look at the pros and cons:
Pros
A giant. Chevron covers all main segments of the energy business. It even has operations in mining, chemicals and power generation.
In the latest quarter, the company generated $6.2 billion in earnings and pulled off $750 million in stock repurchases. The dividend was also increased by 8.3%, with the current yield at 3.1%. Chevron has hiked its dividend every year for the past 24 years.
Gulf of Mexico. After the BP (NYSE:BP) disaster, it has been extremely difficult to resume operations in this region as well as get new permits. But it looks like things are starting to improve. It certainly helps that Chevron has a strong safety record.
Unconventional energy. Over the past decade, there have been significant technical breakthroughs in the natural gas market. For example, it is possible to unlock this energy source from shale.
As for Chevron, it is a leader in this business. In fact, the company recently purchased Atlas Energy, which has strong assets in the Marcellus Shale formation in the eastern U.S.
Cons
Production. This is a big issue for all major oil companies. To find new sources, a company needs to make massive, long-term investments. Besides, the locations of new oil deposits are usually in politically unstable areas.
Global economy. There are some concerns that growth may be slowing. Perhaps the biggest problem is China. With higher interest rates, the demand for oil may start to falter.
Another drag is Japan, as that country tries to deal with the aftermath of the massive earthquake and tsunami.
Regulations. There are many problems on this front. However, one big risk factor is about the use of fracking (fracturing underground rock) to unlock natural gas. The claim is that it pollutes local water supplies. Thus, a moratorium could pinch revenue for Chevron.
Verdict
Going forward, Chevron’s deepwater experience should be critical. Besides its strong presence in the Gulf, it has operations in places like West Africa, Australia and even Thailand.
Of course, the main driver will be the price of crude. And it does look like it will remain robust, especially in light of the tight supplies and the growing world economy.
In other words, the pros outweigh the cons on the stock.
Tom Taulli’s latest book is “All About Short Selling” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.
