CVX with Nobias technology: Is Chevron Still A Buy After Its 27% Year-to-Date rally?
Right now, one of the major headwinds that the broader market faces is rising oil prices. Inflation in the energy space hits just about everyone’s pocket books. It hurts the bottom lines of businesses that have to allocate capital towards energy resources. And, on the consumer side, it hurts bullish sentiment and has historically led to reduced discretionary spending, as higher prices at the pump result in a higher percentage of savings being directed towards energy expenses. Inflation was already a major financial theme heading into February and now we’re seeing the war in Ukraine drive energy prices even higher.
The International Energy Agency (IEA) recently published a report highlighting the potential impacts that the Russian invasion of Ukraine and the global sanctions put onto the Russian economy could have on oil prices. The report read, “An invasion into the Ukraine by Russian troops on 24 February 2022 has as of yet not resulted in a loss of oil supply to the market. Prices nevertheless surged by $8/bbl to $105/bbl following the news, on expectations that sanctions against Russia would cripple energy exports. It is currently unclear what the impact of sanctions will be on energy flows and how long any potential supply losses will last.”
The report continued, highlighting Russia’s oil production, saying, “Russia is the world’s third largest oil producer behind the United States and Saudi Arabia. In January 2022, Russia’s total oil production was 11.3 mb/d, of which 10 mb/d was crude oil, 960 kb/d condensates and 340 kb/d NGLs. By comparison, US total oil production was 17.6 mb/d while Saudi Arabia produced 12 mb/d.”
CVX March 2022
Finally, the report also touched upon Russia’s oil exports, saying, “Russia is the world’s largest exporter of oil to global markets and the second largest crude oil exporter behind Saudi Arabia.” Therefore, it shouldn’t come as a surprise to investors that oil prices have been on the rise in recent weeks. Just this morning, the price of oil hit a 52-week high.
A recent CNN article highlights the pre-market rise which read, “Brent crude futures, the global benchmark, increased nearly 6% to $110.90 per barrel at 5:30 a.m. ET. US oil futures traded with a slight discount at $109.30 per barrel. In Europe, the price of wholesale natural gas spiked 60% to a record high of €194 ($215) per megawatt hour. That's more than double where it stood last Friday.” And with this in mind, investors who are fearful of ongoing inflation (especially in the energy markets) are likely looking for potential safe havens. Chevron (CVX) is one of the world’s largest integrated oil companies, it is important to see what the credible authors and analysts that we track with the Nobias algorithm have had to say about the stock recently.
Chevron shares have been on quite a run in recent days. The stock is up 11.03 during the last week alone. On a year-to-date basis, CVX is up 27.58%. However, even after this recent rally, when looking at the sentiment expressed by the credible (4 and 5-star rated) authors that we track, it’s clear that the sentiment surrounding this stock remains very bullish. Right now, 92% of the recent reports published by credible authors have expressed “Bullish” sentiment.
Several recent bullish reports were published by Daniel Foelber, a Nobias 5-star rated author who covers energy markets at The Motley Fool. In a recent article titled, “7.5% Inflation: 2 Safe Dividend Stocks to Buy Now” Foelber highlights CVX as a potential safe haven for investors looking for shelter in today’s inflationary environment.
Regarding inflation, Foelber said, “One way to invest in businesses that can perform well during inflationary times is to find the industries causing inflation and avoid the ones most vulnerable to it. Higher oil and gas prices are contributing to inflation right now.” He acknowledged that one of the primary reasons that stocks in the energy sector have underperformed for much of the prior decade was because of aggressive capital expenditures and poor cost controls. Yet, it appears that Chevron has changed its ways in recent years. The company is clearly focused, not just on ramping production, but also, on increasing its bottom line.
Regarding CVS’s fundamentals, Foelber wrote, “2021 revenue was up only 15.5% in five years, but net income was up 70%, and free cash flow increased over 200% -- a sign that Chevron is converting more sales into actual profits.” He continued, “A lean business operating in the heart of an industrywide boom should allow Chevron to have another excellent year in 2022. In its fourth-quarter 2021 conference call, management indicated it would stay disciplined and keep capital spending under control so as not to overexpand and leave the company vulnerable during a downturn.”
In a second recent report, Foelbert touched upon recent M&A activity, with CVX showing savvy awareness to pick up beaten down assets during the COVID-19 recession period in 2020, which not only reduced its energy footprint, but also reduced its cost of production. He said, “In 2020, Chevron reduced its capital expenditures to $8.9 billion as it cut costs to make ends meet. However, Chevron also played some offense by acquiring Noble Energy in an all-stock deal valued at $13 billion -- which included around $8 billion of Noble Energy's debt. Chevron announced the deal in July 2020 and closed it in October 2020.”
Foelber continues, “The deal gave Chevron 92,000 largely contiguous acres in the Permian Basin at the cost of less than $5 per barrel of oil equivalent (BOE) of proven reserves and less than $1.50 per BOE for 7 billion barrels of risked resource. In total, it added 18% to Chevron's total proven reserves as of year-end 2019.”
Regarding cost reductions, he noted, “The deal reduced Chevron's cost of production, something the company has expressed as one of its core strategic goals. Today, Chevron can achieve breakeven positive free cash flow (FCF) at around $40 per BOE, allowing it to operate successfully in good times and bad.”
Lastly, he believed that CVX’s strong balance sheet allowed the company to go shopping while sentiment was poor. He said that this value oriented approach, when it came to the Nobel Energy acquisition meant that “Chevron was able to buy the company at a steep discount to what it would be worth today.”
Foelber mentioned CVX as a top pick in a recent discussion about “ultra safe dividend stocks” to buy during the market volatility during February, saying, “for over 30 years, Chevron has consistently paid and raised its annual dividend, making it one of the few energy stocks on the coveted list of Dividend Aristocrats (members of the S&P 500 that have raised their dividend for at least 25 consecutive years).” He continued, “Chevron raised its dividend in 2020 -- a year where many of its competitors were reducing their dividends. Chevron also raised its dividend in 2021 from $1.34 per share per quarter to $1.40 per share per quarter. A couple of weeks ago, it increased the quarterly dividend yet again to $1.42 per share.” He noted that this dividend growth was more than supported by the company’s fundamentals (due, largely to management’s renewed focus on cost reduction and operational efficiency).
Foelber wrote, “In 2021, Chevron spent just $8.1 billion in capital expenditures and earned a record-high $21.1 billion in free cash flow that it can use to grow the dividend, buy back stock, and reinvest in the business.” And, while Foelber has been prolific recently with his CVX coverage, we see that he isn’t the only credible author who has recently published a bullish report on the stock.
George Budwell, a Nobias 4-star rated author, recently mentioned CVX in a bullish light in his article titled, “2 Incredibly Cheap Value Stocks to Buy in February”. This article was written on February 1st, but Budwell showed great foresight, saying, “If crude oil prices do indeed breach $100 a barrel this year as some analysts predict, for instance, Chevron's top line could jump by as much as 19.6% this year, according to Wall Street's most optimistic forecast.” He continued, “That kind of explosive top-line growth would mean that the oil and gas giant's shares are currently trading at under nine times 2022 projected earnings. To put this figure into context, the three-year average price-to-earnings ratio for oil and gas stocks at large is roughly 13.4 at the time of this writing. Therefore, Chevron's stock might be deeply undervalued right now.” And, Budwell said that not only has CVX been quite generous with its dividend recently, but with its buyback as well.
Regarding shareholder returns, he said, “The energy titan also noted during its latest quarterly update that share buybacks this year should range from $3 billion to $5 billion. Depending on how aggressive the company gets with share repurchases, Chevron's bottom-line growth could surpass even Wall Street's most bullish forecast for 2022.”
Budwell noted that all is not well with the company (all equities are risk assets and no stock is ever perfect), writing, “The one drawback with this story is that Chevron is facing some hefty production headwinds in key foreign territories right now.” However, overall Budwell made it clear that he believed shares were cheap and likely to produce “market-beating returns for shareholders this year”.
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.
It’s important to note that all of these reports were published before the most recent leg of CVX’s 2022 really. Few analysts predicted a war in Ukraine coming into the year and therefore, most full-year price targets for CVX have not baked in the recent uptick in oil prices. With that in mind, we see that the credible Wall Street analysts that the Nobias algorithm tracks are relatively bearish on CVX stock, at least, when it comes to their price targets.
While we see quite a few “Buy” ratings up and down the credible analyst list when it comes to CVX, the average price target being applied to these shares by these individuals and the firms they work for is currently $133.63. CVX closed the trading session yesterday with a share price of $149.72 and right now, as I write this, shares are up in the pre-market, with futures pointing towards a $151.83 open.
In short, the stock’s current price is roughly 12% above the current average price target being applied to shares by the credible Wall Street analysts that we follow. However, we also think it’s important to note that unique circumstances in the energy space right now (related to the war in Ukraine) mean that these price targets are largely lagging indicators and we wouldn’t be surprised to see upgrades to CVX price targets in the near-term as the Wall Street community begins to calculate 2022 returns with $100+ oil in mind.
Disclosure: Nicholas Ward has no positions 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.