The energy sector has been a wild ride in recent years as we’ve seen some pretty big price swings in commodity prices. We’ve gone from boom times to buts, only to start booming once again. In that volatility, many investors have found comfort in some of the largest energy firms out there. And you can’t get much bigger than top-performer Chevron Corporation (NYSE:CVX).
As one of the largest energy firms in the world, Chevron features a multitude of assets across the up-, mid- and downstream sectors of the energy industry. The integrated nature and huge size of CVX asset portfolio allow it to perform well in all sorts of oil and natural gas price environments.
That’s exactly what you want in a period of volatile oil prices. So, the attraction to Chevron stock is certainly warranted.
However, Chevron isn’t without its faults. Some of those blemishes are pretty bad and could seriously derail Chevron stock if things don’t exactly go the integrated giant’s way.
The question is whether or not, those positives outweigh the negatives. With that, let’s take a look at Chevron and run through the pros and cons
Chevron Stock Pros
Better Cash Flows: One of the problems with CVX is that it’s heavily tied to oil prices. That was a huge concern during the oil downturn as the firm’s cash flows suffered in a big way. There was even talk that Chevron would have to cut its dividend because of this.
However, higher oil prices equal higher cash flows.
Because of rising oil prices, Chevron’s cash crunch seems to be abating. Over the last quarter, the trend has been higher and higher. Thanks to rising production, higher prices and lower costs at its upstream segment, CVX expects to generate around $14 billion in cash flows this year.
That won’t cover all its spending and needs, but it’s much better than even a few quarters ago and provides plenty cushion for shareholders today.
Dividends: All of that extra cash means one thing- more dividends. When it comes to rewarding investors in the oil patch, CVX is one of the best, courtesy of a rich dividend payout. Today’s $4.48 annualized payout per share equates to a juicy 3.38% dividend yield. Because of the higher cash flows and improving earnings, that dividend is once again in the safe category.
What’s better is that its improving cash flow situation should allow management to feel good about raising its dividend further in the months ahead.
Deepwater Starting to Become Profitable: With oil being relatively low, many energy firms have abandoned deep water drilling in the Gulf of Mexico. That’s made them a cheap bet for elephants seeking energy stocks. That includes Chevron. CVX has managed to snag a bunch of new leases in the Gulf for a song.
Even better is that thanks to new technology, Chevron estimates that deep water drilling will be as cheap as drilling for shale sooner and later.
In fact, CVX estimates that it could make money as low as $40 per barrel for some of these projects as they come one. That’s huge news and opens up a huge amount of profit potential for Chevron that is currently not being utilized because of lowest oil prices.
Chevron Stock Cons
Climate Change Lawsuit: Perhaps the biggest hindrance to Chevron’s performance is a big legal battle brewing in California. Coastal cities of San Francisco and Oakland are suing CVX -as well as Exxon Mobil Corporation (NYSE:XOM) and others- to help pay for a levy system that will keep rising ocean waters from destroying into their cities.
The argument is that climate change and big oil’s willingness to misinform consumers about the dangers of climate change and energy use put them at fault.
Why that may sound farfetched as grounds for a lawsuit, it actually has very similar undertones to the lawsuits that hit Big Tobacco. And we all know what kind of settlements, annuities, and fees that Big Tobacco was hit with.
The potential negative effects are pretty big for Chevron stock. And while the verdict could change history, it could seriously change CVX’s fortunes as well. It’s a big trial and the energy sector isn’t going to get out of it easily.
International Downstream Going Down: Rising oil prices have been good for Chevron’s E&P assets, but not so good for its downstream segment. Right now, prices for oil have risen to the point that they’ve started to crimp earnings at its refining operations.
This is especially true on the international side of things and is evident by its poor refining earnings last quarter. The oil major’s downstream operations came in at just $84 million during the fourth quarter of 2017. That’s down from the $357 million during the fourth quarter of 2016.
If this trend continues, the lower earnings from downstream could significantly hinder CVX’s overall performance. You can already see that investors aren’t too pleased. Shares dropped around 10% when CVX reported the major miss.
Getting Out Of LNG: Liquefied natural gas (LNG) was supposed to be the wave of the future as many nations’s seek to wean themselves off of coal and other higher carbon fossil fuels. Chevron has emerged as one of the leaders and has spent billions building out facilities across the globe. And now it wants out.
The firm is looking to sell a stake or in the entirety of its Kitimat LNG project in Canada. The sale comes as there is the beginnings of a glut in LNG and prices for the fuel are beginning to drop. While it may be just to help fund the project’s expansion, the sale is a stark reminder that not all mega projects work out. In this case, it’s a big black eye on a big bet on the future of energy.
Skipping Chevron Stock for Now
So, is Chevron stock a big buy? I’m inclined to say it’s a hold. While the firm does have some very good points- such as its rising cash picture and dividend, the lawsuit is a scary proposition and could open the firm- and the rest of big oil- to a variety of tobacco0style litigation. At the same time, shares of CVX aren’t exactly dirt cheap with a P/E of 23.
For those who already hold shares, the positives are good and the lawsuit doesn’t immediately equal destruction for the firm. The dividend should provide plenty of cushion for the ride ahead- at least until the verdict is known