Chevron: A Fire-Sale Price for Patient Investors?

08/07/2020 5:00 am EST

Focus: ENERGY

Tom Hutchinson

Editor, Cabot Dividend Investor

Out-of-favor sectors are an ideal place to find companies with great businesses at fire-sale prices, observes Tom Hutchinson, growth and income expert and editor of Cabot Dividend Investor.

Of the 11 S&P 500 market sectors, energy has been among the the worst performers this year and for the past one-year, three-year and five-year periods as well. For patient investors, it might be a good time to look at one of the very best ideas in the sector.

Chevron (CVX) is one of the world’s largest integrated oil and gas companies, with operations all over the world. The company is involved in every facet of the energy industry but revenue is heavily skewed toward exploration and production.

Chevron is exposed to oil and gas prices. However, it can compensate for lower prices because it operates with lower costs and higher margins than the other large integrated oil companies.

The tough energy market of years past made this company lean and mean with more upside leverage when things turn around. Chevron’s cost per dollar of business operating expenses produced has fallen from $18 in 2014 to under $10 today.

Chevron went into this recession in great shape. The company invested heavily in growth projects in recent years and had cut back on capital expenditures.

It also carries lower debt than its peers, boasting an industry-best 0.25 debt/equity ratio. It also has a strong cash position, a low payout ratio and the ability to preserve cash. For example, the company cut back project expenditures by $4 billion.

The company can turn a profit fast as things improve and it has strong leverage to benefit going forward. It has several projects that recently came online and now has peer leading production growth.

Chevron also has a huge and growing presence in the Permian Basin, the largest shale oil producing region in the U.S. and, by far, the fastest-growing oil region in the world.

The stock is down 27% so far this year and is now priced 35% below the 2018 high. The cheap price has raised the dividend yield to a highly attractive 5.7%.

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