Rather than thrive, energy companies are mostly just trying to survive. So-called “Big Oil” isn’t so big anymore as the market capitalization of Chevron (NYSE:CVX) and its brethren has been decimated. Chevron stock represents an unloved market sector, but is this really time to hoard shares on the cheap?
There are no easy answers here. A number of factors have unknown endpoints. Still, there is data worth examining. By looking at what we do know about the situation, we can make an informed decision about whether or not to own Chevron stock now.
Shale Boom and Bust
It would be absurd to try to predict how long the coronavirus crisis will last or how extensive the fiscal damage will be. Here’s what we do know at the moment (though this is always subject to change). The White House has limited or restricted travel in one form or another to Mexico, Canada, Iran, China, Europe, Ireland and the United Kingdom.
Moreover, the U.S. State Department has announced a global level 4 travel advisory. This means it strongly recommends that Americans avoid all international travel. Some other nations have issued travel bans and advisories of their own. All of this spells trouble for the already beleaguered American energy companies.
On top of that, Chevron and other American Big Oil corporations must deal with the price-suppression war between Russia and Saudi Arabia. The revolution in American shale oil began in earnest around 2008. Today, it appears that U.S. companies drilling in the Permian Basin are facing an existential crisis as oil-rich nations can lower petroleum prices at will.
Lesser players like Diamondback Energy (NASDAQ:FANG) might not survive the shale bust at all. At the very least, they’ll likely have to make severe cuts to their dividends. Income-oriented stockholders might be driven away from those companies.
Keeping It Clean
Chevron’s forward dividend yield of 8.99% might actually be safe, however. CFRA analyst Stewart Glickman assesses Chevron as being in a decent fiscal position, stating that the company has a “very clean” balance sheet.
Indeed, having a debt-to-capital ratio of around 10% to 11% sounds pretty clean to me. To offer you a means of comparison, Glickman notes that the typical debt-to-capital ratio for an exploration-and-production company would be around 35%. So, maybe it’s not so bad to be unloved if Chevron can maintain its fiscal hygiene.
To this end, Glickman expects Chevron to reduce its capex budget for 2020. Capex is a fancy way of saying capital expenditures, or what a company might spend on machinery, buildings, equipment and so on. A reduction in capex spending would be a great way for Chevron to reduce the impact of the shale-oil bust.
Perhaps it could even help to preserve Chevron’s excellent dividend yield. It remains to be seen whether the company will exercise enough fiscal discipline to achieve this. Still, it’s evident that energy stocks are trading at depressed valuations. Wells Fargo’s Roger Read views this not as a reason to panic but as a potential opportunity:
“[T]he surviving oil and gas companies should be able to deliver attractive equity returns—and those are the companies we advocate buying with an eye on judicious entry points. With any cyclical sector, generating outsize returns often means buying when it does not feel good and the outlook is uncertain and gloomy. We can say without hesitation, it just feels awful today.”
The Takeaway on Chevron Stock
The Wells Fargo analyst’s point is well taken. Just because Chevron stock is unloved doesn’t mean it’s unlovable. Hopefully the company will demonstrate financial discipline and maintain its attractive dividend yield. Big Oil is in big trouble, yes, but when the dust settles Chevron could be a big winner.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.