Oil and gas prices remain weak, but producers with high-quality assets will be in a good position to prosper when the slump ends. Chevron Corp. is a leading oil and gas producer with two new offshore gas projects and a profitable refinery business. The company continues to cut costs and sell less-important assets. This should let it conserve cash, as well as keep paying its high dividend. We view Chevron as an energy stock to buy.
The outlook for oil and other commodities remains weak, but we still feel that most investors should devote 10% to 15% of their portfolios to resource stocks. But only buy these or any stocks if you are prepared to hold them for at least the next several years. To further cut your risk, you should focus on companies with high-quality reserves, like the company we analyze below.
CHEVRON CORP. (New York symbol CVX; www.chevron.com) produced an average of 2.54 million barrels of oil a day (including natural gas) in the three months ended September 30, 2015. That’s down 1.1% from 2.57 million barrels a day a year earlier.
The decrease is mainly because Chevron has sold $11 billion worth of less important businesses since 2014; the company aims to sell another $5 billion to $10 billion worth of assets by the end of 2017.
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In addition to the lower production, Chevron’s realized oil price plunged 51.7% in the latest quarter, while gas prices fell 43.4%. As a result, the company’s overall revenue declined 37.2%, to $34.3 billion from $54.7 billion. Earnings dropped 63.6%, to $2.0 billion, or $1.09 a share, from $5.6 billion, or $2.95.
Energy stocks: Refinery business profits from low oil
However, Chevron’s refineries continue to benefit as the drop in crude oil prices reduces their input costs: the company’s refinery business reported 59.4% higher earnings in the latest quarter.
In response to weak oil prices, Chevron plans to lay off 10% of its workforce. It will also lower its 2016 capital spending by 24% from what it will probably spend for all of 2015, to $26.6 billion.
Meantime, the company should benefit from the start-up of two big offshore gas projects in the next 18 months: the 47.3%-owned Gorgon field, off Australia’s northwest coast, and the 64.14%-owned Wheatstone field, located nearby. Each will also have a plant to convert the gas into a liquid for shipment to buyers in Asia.
The company’s strong balance sheet will also help it cope with low oil prices: as of September 30, 2015, it held cash of $13.2 billion, or $7.03 a share. Its long-term debt of $29.3 billion is a moderate 17% of its market cap.
The stock trades at a high 22.4 times Chevron’s depressed 2016 earnings forecast of $4.16 a share. The $4.28 dividend seems safe and yields 4.6%.
Recommendation in the Wall Street Stock Forecaster: Buy
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Oil and gas prices remain weak, but producers with high-quality assets will be in a good position to prosper when the slump ends. Chevron Corp. is a leading oil and gas producer with two new offshore gas projects and a profitable refinery business. The company continues to cut costs and sell less-important assets. This should let it conserve cash, as well as keep paying its high dividend. We view Chevron as an energy stock to buy.
