Chevron Corporation CVX, one of the largest publicly traded oil and gas companies in the world, is taking significant steps to optimize its asset portfolio. On Monday, one of its subsidiaries, announced a definitive agreement to divest critical assets to Canadian Natural Resources Limited CNQ. This transaction, valued at $6.5 billion, marks a pivotal moment in CVX's strategy to streamline its operations and focus on high-potential areas within its global portfolio.
So, is it the right time to stock up on Chevron shares? Let’s delve deeper into the deal, along with the company’s strengths and weaknesses.
Chevron to Sell Key Assets Worth $6.5B
Under this agreement, Chevron Canada Limited will sell its 20% non-operated interest in the Athabasca Oil Sands Project and its 70% operated interest in the Duvernay shale, along with other related interests situated in Alberta, Canada. This sale aligns with CVX’s goal to divest between $10 billion and $15 billion in assets by the year 2028, aiming to enhance its operational efficiency and financial health.
Other Reasons to Like CVX Stock
Chevron Moves Above 200-Day SMA: The company has reached a significant support level, making it an attractive option for investors from a technical standpoint. On Oct. 2, the stock broke through its 200-day simple moving average (SMA), indicating a potential short-term bullish trend. This suggests that recent prices are higher than the average price over the last 200 days, which can be a sign of strengthening momentum and potential bullish sentiment among investors.
CVX Breaks Out Above the 200-Day Moving Average
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Strong Production Growth Through 2027: Chevron's strategic focus on the Permian Basin is expected to fuel significant production growth, targeting nearly 4 million barrels of oil equivalent per day by 2027. This expansion is bolstered by key acquisitions like PDC Energy, which has already contributed to an 11% rise in global net oil-equivalent production in Q2 2024. By continuing to ramp up production, the company can also mitigate revenue pressures from lower oil prices, creating a buffer that could support its earnings.
Strategic Refining Investments for Future Growth: While Chevron's exposure to California’s increasingly stringent regulations poses challenges, the company's strategic pivot toward renewable diesel presents an opportunity. By converting parts of its refining capacity to handle renewable diesel, Chevron aims to future-proof its refining business. Although early-stage, this move positions Chevron to capitalize on the global energy transition while maintaining competitiveness in a heavily regulated environment.
Dividend Stability and Growth Potential: Chevron offers an attractive 4.3% dividend yield, supported by a low payout ratio of about 54%, making it a reliable option for income-focused investors. Over the past five years, Chevron has increased its dividend by a compound annual growth rate (CAGR) of more than 6%, and the company hasn't cut its dividend in 90 years.
Discounted Valuation Relative to Peers: Chevron's stock is attractively valued, trading at a multiple of 5.97 based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization). This is around 6% below its ten-year average and compares favorably to its peer, ExxonMobil XOM. The company has a Value Score of B.
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Chevron’s Stock Performance
Chevron has gained just above 1% since the beginning of 2024, significantly underperforming the sector. The company has also fared much worse than its larger ExxonMobil. This decline, puzzling in light of the strong production outlook and dividend stability, primarily reflects CVX’s exposure to unpredictable commodity prices.
CVX and XOM Stock Performance Comparison
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Red Flags for Chevron Stock
Oil Price Volatility: Chevron’s heavy reliance on oil prices poses a significant risk to its profitability. Oil prices are inherently volatile, driven by global demand fluctuations, geopolitical events, and macroeconomic factors. Even small declines in oil prices can severely impact Chevron’s revenue and earnings, as seen during previous oil price downturns. This sensitivity to market shifts may put downward pressure on Chevron’s stock, especially if global demand weakens.
Analysts Take a Bearish Stance on CVX’s Earnings Outlook: The supermajor player has lately been on the receiving end of negative earnings estimate revisions. Looking at the third quarter, analysts have slashed estimates by 11% in the past 60 days. The Q3 Zacks Consensus Estimate is now $2.80 per share, reflecting negative growth of 8.2% relative to the prior year. In addition, the company is in the Zacks Oil and Gas Integrated International industry, which is currently ranked in the bottom 8% of all Zacks industries.
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Overly Optimistic Buyback Plans May Require Adjustments: Chevron’s consensus buyback target of $4 billion per quarter for the second half appears overly optimistic, given its current cash flow challenges. With projected free cash flow unable to cover both dividends and buybacks, the company will likely need to pull an additional $5 billion from its balance sheet to fund distributions.
Geopolitical Exposure in High-Risk Regions: Chevron’s significant operations in politically unstable regions like Kazakhstan and the Middle East expose it to geopolitical risks. Disruptions caused by political instability, sanctions, or conflicts could affect production and supply chains, leading to increased operational costs and potential losses.
Conclusion: Don’t Rush to Buy Chevron Stock
In view of the divestiture of CVX’s interests in the Athabasca Oil Sands Project and the Duvernay shale, investors should closely monitor the outcomes of this strategic decision. We believe that the existing shareholders should consider keeping an eye on CVX for more gains in the near future, especially given the technical strength observed in the stock. However, there are a few things to consider.
On the horizon, Chevron looks cheap, but the company could end up becoming a value trap as its EPS outlook continues to weaken. The fact that CVX is included in one of the worst-performing industry groups provides yet another headwind. Meanwhile, new investors may consider adding the stock to their watchlist and initiating positions during market dips.
Chevron currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
