After strong earnings in late-April, Chevron Corporation (NYSE: CVX ) has been basking in the sun. Or would basking in the Permian be more appropriate? Either way, Chevron stock has been surging in light of its results and rightfully so. But does that leave investors in a precarious position?
Under the current environment, there are reasons to be cautiously optimistic about Chevron stock. Of course, this also depends on when investors bought the name. Had they bought near the 2016 lows, which persisted for a few months, investors are almost looking at a double and are more likely to sit tight and ride out any potential storms. Recent or prospective investors may want to take a closer look though, to see if CVX is stll a good fit in their portfolio.
The Good for Chevron Stock
On the plus side, CVX's business is exploding higher right now. We saw that in its most recent quarter, where operating cash flow and net income ballooned 31.5% and 33%, respectively. Revenue grew more than 13% in the quarter, a solid result given the tough comp it had from first quarter 2017 where sales jumped more than 40%. It also marks five straight quarters of double-digit sales growth.
For what it's worth, Chevron has now reported positive earnings per share for seven straight quarters.
More good? Its upstream business is doing really well, thanks in part to the Permian. Upstream earnings more than doubled year-over-year (YoY) to $3.35 billion, helping to offset some of its downstream YoY losses. From management, regarding the Permian:
"Looking forward, we forecast Permian unconventional growth of 30% to 40% annually through 2020 … We think there's still opportunity to lower development costs, lower operating costs there and maximize revenue streams out of that, so that will be a primary area of focus for us, getting really good efficiency out of that particular asset."
As Goes Oil, So Goes Chevron Stock
Oil companies are producing so much oil in the Permian right now that even the pipelines can't move it fast enough. As the price of crude continues to rise (more on that in a minute), companies are selling their Permian oil for less than face value to move as much as they can.
That's according to the Wall Street Journal and would actually be bad news for Chevron to some degree. A little price deterioration isn't an issue, but a steep discount wouldn't be good.
Further, we need to keep an eye on oil prices. Hedges aside, investors base their sentiment for future business on the price of crude. When it rallies, so too does the Energy Select Sector SPDR (ETF) (NYSEARCA: XLE ) and Market Vectors Oil Services ETF (NYSE: OIH ). So do countless other energy stocks. Worth noting is that Chevron is the second largest holding in the XLE, right behind Exxon Mobil Corporation (NYSE: XOM ).
With WTI crude prices up 17.5% this year, the commodity is worth watching. It wouldn't be surprising to see those gains fade, particularly with the supply coming out of the Permian. However, conflicts in the Middle East and the crippling economic situation in Venezuela could keep oil prices elevated.
That leaves us in a mixed situation, but one that says business is going well for CVX. Like we said in the beginning - cautiously optimistic.
Trading Chevron Stock
Another piece to that cautious feel comes from the charts.
Click to Enlarge
As you can see above, Chevron stock is approaching resistance up near $133. CVX hit that level in January and promptly fell more than $20 per share before finding support from its 200-day moving average. Further, history says when the RSI (blue circle) is over 70 and the MACD (orange circle) gets to these levels, CVX stock has trouble proceeding.
Perhaps it would be in the best interest of current longs and prospective bulls if Chevron pulled back 5% to 8%. There should be plenty of support below, allowing CVX time to digest its recent rally. It should give CVX enough energy for a breakout as well and allow for a solid buying opportunity.
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