Chevron Stock Has Gone Too Far, Too Fast

Stocks to sell

[Editor’s note: “After 70% Rebound, It’s Time to Ditch Chevron Stock” was originally published April 6. It has since been updated to reflect the most relevant information available.]

After 83% Rebound, It’s Time to Ditch Chevron Stock

Source: Jeff Whyte /

What’s next for Chevron (NYSE:CVX)? Like its major oil company peers, Chevron stock has moved higher in the past two months, as oil prices make an epic recovery.

But, as shares have rebounded about 84% from their 52-week low ($51.60 per share), are they a buy at today’s prices?

It all depends. If oil’s major rebound continues, shares could continue heading back to past highs (around $120 per share). On the other hand, if energy prices tread water from here, expect shares to drip from their current price level (around $95 per share).

With this in mind, it doesn’t look promising to buy CVX at today’s prices. Why buy now, if you could wait to enter a position on a pullback?

As the macro outlook remains uncertain for the energy sector, it may be best to sit tight. Today’s crude oil recovery could easily turn on a dime.

Rebounding Energy Prices and Chevron Stock

As coronavirus headwinds start to enter the rearview mirror, depressed oil prices may soon be behind us as well. With the world slowly “returning to normal,” crude oil demand could continue to head higher.

But that’s not all!  With the IEA (International Energy Agency) predicting oil demand not only to bounce back, but exceed pre-crisis levels, there’s plenty to be hopeful for in the oil patch.

Yet, that doesn’t guarantee oil prices continue to trend upwards. A weakened economy could linger on long after the outbreak ends. Considering it’s debatable whether we’ll see a V-shaped (sudden), or a U-shaped (slower) recovery, don’t expect things to bounce back to 100% within a few months.

What does that mean for oil? Since May, oil has climbed from around $20 a barrel to nearly $37 a barrel. But it’s uncertain whether oil continues to climb well above the breakeven price of Chevron’s more profitable operations. In short, expect the company to continue playing defense until prices return to prices above $50 a barrel.

Dividend and Valuation

A key question regarding Chevron is the dividend. Even after rallying in the past two months, the company still has a “high yield” dividend. As today’s prices, the yield stands at 5.45%.

Yet, that high yield also demonstrates investors remain fearful of a dividend cut. That’s reasonable, given to what’s happened with the dividends of many of the company’s peers. However, this doesn’t appear to be in the cards. The company’s plans to cut production and expenses free up cash, allowing it to continue its current payout levels.

Chevron’s management knows the importance of maintaining its dividend. It knows many of its shareholders are income investors. If they cut the dividend, these investors will bail, sending shares lower.

Assuming the dividend is safe, shares could see limited downside. Yet, is there a pathway for shares to move higher in the next year?

That’s going to be a challenge. For the stock to rebound back to past highs, oil needs to continue making an epic recovery.

Back in 2018, Chevron posted earnings of $14.9 billion. But that’s back when the average closing price of oil was around $65 a barrel. Oil prices may have to return to such levels in order to move the needle again.

Given today’s oil price trends, that means another 75% move higher for that to happen!

Buy CVX on a Dip, But Hold Off for Now

Although the coronavirus is coming to an end, investors may have gotten ahead of themselves bidding up oil stocks like Chevron. With this in mind, it’s reasonable to assume shares will pull back.

Yet, that’s not to say the stock will retest past lows. The company’s recent moves to protect the dividend is a positive factor. In a low-interest world, it’s tough to find yield. Income investors may help support the stock’s current price level.

Regarding upside, nothing’s guaranteed. We could see a long-term oil price slump. But given the unpredictability of oil markets, crude oil prices may rebound back to prior levels, moving the needle. However, this is a long-shot catalyst for now.

In short, wait for a pullback before buying Chevron. With Wall Street pricing in a recovery, shares may not be worthwhile right now.

Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.

Products You May Like

Articles You May Like

Top Stock Picks for Week of October 19, 2020
264 TIP. Mastermind Discussion 3Q 2019

Leave a Reply

Your email address will not be published. Required fields are marked *