Should one consider Buying, Selling, or Maintaining investments in Chevron?
Over the past few years, oil and gas companies have journeyed through turbulent waters. The pandemic decimated oil demand, causing prices to plummet. However, the landscape shifted drastically when Russia invaded Ukraine, causing oil prices to skyrocket. Many companies in the sector seized this opportunity, using their windfall profits to strengthen their financial positions and reward shareholders.
Unfortunately, oil and gas stocks have lagged behind the S&P 500 since the start of 2023. Chevron, for instance, has seen a nearly 11% decline, while the S&P 500 has soared 60%. If you're considering investing in Chevron, here's what you need to know.
Chevron's cyclical business and oil price sensitivity
Chevron, a prominent player in the oil and gas sector, is subject to the whims of commodity prices. This cyclical nature makes the stock vulnerable to overall market conditions and the impact on oil and gas prices.
During the mid-2010s, many oil companies ramped up drilling activities, leading to high capital expenditures and a downward spiral in prices. Companies faced dwindling earnings and falling stock prices, with 2020 presenting another demand shock for the industry.
Conversely, the surge in oil prices post-Russia's invasion resulted in record-breaking highs, leading to substantial profits for major players like Chevron. However, Chevron's integrated business model aims to mitigate some of these volatilities. It drills and produces oil and gas (upstream), operates in the transportation and retail sectors (midstream and downstream), providing additional income from transporting fuel, operating gas stations, and refining crude oil.
Chevron used its windfall profits to improve its financial position and return more capital to shareholders. In 2024, it returned $27 billion, including $11.8 billion in dividends and $15.2 billion in share repurchases. Chevron has also maintained a growing dividend for 37 consecutive years, showcasing its prudent financial management in a cyclical business and dedication to rewarding investors.
Oil companies approach capital expenditures with caution
Although President Trump encouraged more drilling, oil companies have remained cautious and strategic in their production strategies. The Industry's leaders understand that ramping up capital expenditures and production in the past led to low prices when demand faltered.
In light of the industry's experience and societal focus on reducing carbon emissions, oil and gas producers have implemented a measured approach to their capital expenditures. Chevron will continue to increase production, although it warned of less growth in the Permian Basin compared to previous quarters. The company intends to moderate growth and capital expenditures, prioritizing predictable free cash flow.
Furthermore, Chevron is awaiting a decision regarding a potential acquisition of Hess. If approved, the $53 billion deal would increase Chevron's presence in key oil-producing regions and provide significant free cash flow over the next several years. However, an ongoing arbitration dispute with ExxonMobil has hindered the agreement, with a final decision expected around August of this year.
In conclusion, should you buy, sell, or hold Chevron?
Chevron is one of the largest oil producers and publicly traded stocks in the industry, boasting a remarkable dividend payout history. However, investors must remember the industry's cyclical nature and recent market performance.
Although Chevron's financial health is generally stable and its stock price has been generally upward-trending, investors should consider commodity price volatility, regulatory pressures, and the energy transition. Careful consideration of these factors is essential for making an informed investment decision.
- Given Chevron's cyclical business and oil price sensitivity, investors considering investing in the company need to account for volatility in commodity prices and the overall market conditions.
- Over the years, Chevron has demonstrated prudent financial management, using windfall profits from oil price surges to strengthen its financial position and reward shareholders with dividends and share repurchases.
- In an effort to mitigate volatility and ensure predictable free cash flow, Chevron is being cautious with its capital expenditures, prioritizing growth and moderating spending in response to past market experiences and societal focus on reducing carbon emissions.
- The acquisition of Hess, if approved, could significantly enhance Chevron's presence in key oil-producing regions and provide substantial free cash flow in the coming years, although an ongoing arbitration dispute with ExxonMobil may hinder the agreement.
