Chevron: "A Leap of Faith"

12/05/2018 5:00 am EST

Focus: ENERGY

Richard Moroney

Editor, Dow Theory Forecasts

It requires a leap of faith to buy an energy stock when oil prices are falling. But Chevron (CVX) seems positioned to pay off for patient investors, suggests Richard Moroney, editor of Dow Theory Forecast.

Chevron enjoys robust operating momentum, rising profit estimates, an attractive valuation, and a generous dividend yield of 3.8%.

An integrated oil and natural-gas giant, Chevron relies on the U.S. for 38% of revenue and 46% of profits. Its shares have increased 2% since the end of October, while the average S&P 1500 energy stock slumped 10%.

Until recently, Chevron’s exploration- and-production business had benefited from rising U.S. oil prices; the upstream unit (31% of revenue, 78% of net income for the 12 months ended September) has driven growth in the past year, with sales surging 41% and net income quadrupling.

Boosted by drilling projects in Australia and North America, total production rose 4% in the past year, with oil holding flat and natural gas climbing 12%, Oil represents 62% of production, natural gas 38%.

Although falling oil prices aren’t a net benefit for Chevron, its downstream refining business softens the blow. Lower crude-oil prices mean lower costs for refiners. And that often leads to fatter profit margins and a wider crack spread, which measures the price difference between crude oil and refined products. Chevron’s downstream business grew sales 18% in the past year.

Chevron’s earnings per share jumped 99% in the 12 months ended September on 25% higher revenue and 53% higher operating cash flow. With free cash flow turning positive so far in 2018 — after being negative from 2013 to 2017— Chevron has elected to bolster its balance sheet.

Analyst profit estimates for 2019 have steadily trended higher over the past 90 days, with the consensus currently projecting 16% growth. The stock trades at just 12 times estimated 2019 profits. Chevron, earning a Quadrix Overall score of 90, is rated Long-Term Buy.

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