Chevron with Nobias technology: Does This Oil Stock Have More Room To Run After Its 20.5% Year-to-Date Performance?
In 2020, when the COVID-19 pandemic began, forcing governments across the world to enact travel restrictions and other social distancing regulations, demand in the energy markets fell off of a cliff. We saw the price of a barrel of oil plummet and the “big oil” companies all saw their operational performances, and therefore, their share prices, suffer. In 2020, the energy sector was the worst performing area of the S&P 500, down more than 33%. However, when the “reopening” rally occurred during the first quarter of 2021, the energy space was a major beneficiary.
Throughout much of 2021, we’ve seen Investors migrate out of the “stay-at-home” stocks, which were largely centered in the tech sector, due to the acceleration of trends related to the digital workplace, and into the more economically sensitive, cyclical stocks, because of the thesis surrounding a rapidly reflating global economy.
This change of sentiment sent energy from worst to first, in terms of year-to-date performance. It wasn’t long ago that the energy sector was up more than 45% of a year-to-date basis. However, with the rise of the Delta variant, the migration from secular growth into cyclical value has experienced a speed bump, and over the last month, the energy space has become the S&P 500’s worst performing sector, down more than 7.2%.
Energy is still the best performing sector on a year-to-date basis, up 30.3% after the recent sell-off. However, with the threat of another strong COVID-19 wave on the horizon, investors are questioning whether or not we’ll see demand for oil remain elevated.
This has caused weakness in shares on oil/gas related stocks, even though their recent earnings reports beat analyst expectations. It appears that investors are at a crossroads when it comes to “big oil” and with that in mind, we wanted to take a look at Chevron (CVX), which just beat Wall Street’s expectations on both the top and bottom lines.
Martin Baccardax, a Nobias 4-star rated analyst who writes for TheStreet covered CVX’s recent earnings report in an article highlighting the company’s surprisingly good results and renewed buyback plan. He began by highlighting CVX’s bottom-line beat, saying, “Chevron said adjusted earnings for the three months ending in June came in at $1.60 per share, up from a $1.59 per share loss over the the same period last year and four cents ahead of the Street consensus forecast.”
Baccardax then moved to the top-line numbers, saying, “Group revenues, the company said, surged 178% higher from last year to $37.6 billion, again topping analysts' estimates of a $34.7 billion tally.” Baccardax highlighted an earnings related quote from Chevron’s CEO, Mike Wirth which read, “Second quarter earnings were strong, reflecting improved market conditions, combined with transformation benefits and merger synergies. Our free cash flow was the highest in two years due to solid operational and financial performance and lower capital spending.”
Baccardax also highlighted the fact that Wirth said that the company will resume share repurchases in Q3, “at an expected rate of $2 billion to 3 billion per year.” This is bullish for shareholders because it shows that management is confident enough in its cash flows to provide cash to shareholders while still managing its balance sheet and capex requirements.
With regard to shareholder returns and the strength of CVX’s dividend in particular, Rekha Khandelwal, a Nobias 5-star rated analyst who writes for The Motley Fool, recently published an article highlighting CVX’s recent dividend increase. She said, “With a 4% dividend increase for the first quarter, 2021 is Chevron's 34th consecutive year of dividend growth. Not many energy companies can boast of that long of a dividend growth streak. BP and Royal Dutch Shell both slashed their respective payouts last year due to an extremely tough market for oil and gas. Since 2005, Chevron's dividend has grown at a compound annual growth rate of more than 7%.”
However, even while being generous to shareholders, Khandelwal notes that the company has invested enough into growth and exploration projects to maintain its output levels. She wrote, “Chevron's five year reserve-replacement ratio is 99%, which shows that it can largely sustain its production at current levels without exhausting its proved reserves.” Khandelwal continued, saying, “The company expects $14 billion of capital and exploratory expenditure in 2021. Between 2022 to 2025, it expects to spend an average of $14 billion to $16 billion in capital and exploratory projects. That should help it maintain its reserve-replacement ratio close to 100%.”
Lastly Khandelwal highlighted the company’s alternative energy investments, touching upon its partnership with Toyota Motors in hydrogen technology development, before saying, “Moreover, Chevron continues to invest in low-carbon technologies through venture investments in geothermal, wind, and other clean energy projects. That hedges the company's dependence on oil and gas in the very long-term, should their use decline quicker than expected. At the same time, this approach allows it to continue generating cash from its established oil and gas business.”
All in all, Khandelwal believes that the combination of “an established track record of dividend growth, capital discipline with a focus on growth, a strong balance sheet, and openness to emerging low-carbon technologies'' paints a bullish picture for CVX shares. This is why she named Chevron her top energy pick in the month of June. And, Khandelwal isn’t the only analyst who is highly rated by the Nobias algorithm that likes this company as a defensive dividend oriented play.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
in a recent Motley Fool article titled, “Before The Market Crash Comes, Buy and Hold These 3 Dividend Stocks” where various contributors picked their favorite defensive investments to hold throughout periods of market volatility, Daniel Foelber, a Nobias 5-star rated analyst, chose Chevron as his pick, saying, “Chevron is one of the rare energy Dividend Aristocrats. Despite booms and busts in the oil and gas market, it has been able to boost its annual payout for over 30 consecutive years. This consistency is due in part to the strength of its balance sheet, which continues to be arguably the best of the oil majors.”
Foelber mentioned CVX’s cyclical nature, noting, “For better or worse, Chevron stock tends to march to the beat of oil and gas prices rather than if the market is rising or falling.” However, he concluded his bullish pick by saying, “Given this operational advantage, a track record for strong financials, and consistent dividend raises, Chevron is an oil stock worth buying before a market crash.” Overall, 90% of the credible authors that the Nobias algorithm tracks have a “Bullish” outlook on CVX shares.
In the last month alone, we’ve seen 10 reports published on the stock by 4 and 5-star rated analysts. 9 of these reports came with “Buy” ratings and the remainder came with a “Neutral” outlook. Right now, the average price target amongst these highly rated individuals for Chevron is $124.40, which implies 22.2% upside potential relative to the stock’s current share price of $101.81.
Disclosure: Nicholas Ward has no position in any stock mentioned in this article. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.