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What is the Right Approach for Chevron (CVX) Post Q2 Results?
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Chevron Corporation (CVX - Free Report) recently reported its second-quarter 2024 earnings, which fell short of expectations primarily due to weaker natural gas realizations and reduced margins on refined products. Although the company missed bottom-line forecasts, its revenues surpassed expectations, partially mitigating the disappointment.
Chevron achieved an impressive 11% year-over-year increase in production, setting a new quarterly record in the Permian Basin. This robust volume, driven by efficient development strategies, technological advancements and the ongoing integration of PDC Energy assets, positions Chevron to capitalize on any strength in oil price, potentially boosting revenue and stock price.
However, it is not an understatement to say that the market has not been impressed with the company this year. In 2024, the San Ramon, CA-based integrated company's stock has lost 4% against the S&P 500’s climb of 8.9%. During the same period, the Oil/Energy space and its subindustry have declined 1.2% and 3.5%, respectively.
YTD Price Comparison
Image Source: Zacks Investment Research
Given CVX’s underperformance and the recent earnings miss, there appears to be a lack of direction in the investment community. But all is not bad here, as the case for Chevron isn’t weakening. It remains one of the best-positioned global integrated oil companies to achieve sustainable production growth and boast an impressive business model.
A Look at Chevron’s Major Drivers
Long-Term Investment Potential: Chevron’s long-term projects and investments in the oil and gas sector are designed to yield benefits over years or even decades, not quarters. This long-term horizon can provide substantial returns despite short-term market fluctuations. For investors with patience, Chevron's strategic positioning can result in significant future gains once the current market volatility subsides.
Robust Production Growth in Key Assets: Chevron's production growth is impressive, with domestic output driven by the Permian and DJ Basins. Full-year Permian volumes are expected to grow by 15%, with Q4 production anticipated around 940,000 barrels per day. Then, Chevron’s buyout of PDC Energy is already driving substantial production growth in the DJ Basin. The company's anticipated 4-7% production increase in 2024 makes Chevron an attractive investment.
Image Source: Chevron
Strong Financial Base and Dividend Yield: Chevron maintains a robust financial structure with a significant shareholder payout. The company's dividend yield of above 4% is attractive, particularly for income-focused investors, offering a steady income stream even when share prices are stagnant.
Image Source: Zacks Investment Research
Hess Acquisition: Chevron's impending $53 billion takeover of Hess Corporation (HES - Free Report) and its increased investments in key areas like the Permian Basin and Guyana position it for enhanced production and growth. These strategic moves are likely to pay off in the next few years, providing a solid foundation for future revenue and production increases.
Capital Expenditure and Production Growth: Chevron’s commitment to increasing capital expenditure since 2023, coupled with expected production growth in 2024, highlights its focus on future expansion and efficiency. These investments are crucial for sustaining long-term growth and enhancing shareholder value.
Industry-Leading Return on Capital: Despite the recent performance issues, Chevron remains a leader in return on capital employed (ROCE). This metric is crucial for evaluating the efficiency and profitability of a company. Chevron's industry-leading ROCE suggests that it is well-managed and capable of generating substantial returns on its investments.
While Chevron has strong long-term potential, the current market conditions and specific challenges facing the company cannot be ignored.
Risks for the Stock
The ongoing volatility in oil prices due to recession fears and indications of weak Chinese demand, poses significant risks to short-term performance. The broader energy sector is experiencing a period of uncertainty with potential over-supply concerns and fluctuating consumption.
Moreover, the company's valuation remains relatively high, which means the stock might not offer an attractive entry point at this time. Chevron's forward earnings multiple is significantly higher than most of its peers. Despite strong financial performance, the elevated valuation indicates that Chevron is expensive relative to other major oil companies, especially the European ones like Shell (SHEL).
Chevron's downstream segment is experiencing margin compression. In the second quarter of 2024, downstream earnings fell due to lower refining margins and increased operational expenses. With WTI prices expected to stay around $80 per barrel, downstream margins may remain constrained. This could affect Chevron's ability to capitalize on refining operations and reduce overall profitability, especially if refining margins continue to narrow.
Finally, Chevron's planned acquisition of Hess Corporation faces regulatory scrutiny and legal challenges from ExxonMobilXOM, which claims preemptive rights over the Hess stake, potentially delaying the merger's completion. This uncertainty around the deal's completion, which now looks to drag well into 2025, introduces a significant risk factor.
Final Word
Undoubtedly, Chevron is a quality business with a fairly impressive inventory of upstream development projects that will drive production growth in the long run. As one of only two energy stocks on the list of Dividend Aristocrats, the supermajor’s balance sheet is also reasonably healthy, indicating that the dividend should remain safe going forward.
At the same time, investors should note that any dip in oil prices is going to hurt Chevron, whose production profile is heavily tilted toward crude. It has also been facing some headwinds on the Hess merger front. Combined with a stretched valuation, it will be prudent for investors to wait for more clarity and stability before taking a position in the stock.
The stock currently carries a Zacks Rank #3 (Hold).
Image: Shutterstock
What is the Right Approach for Chevron (CVX) Post Q2 Results?
Chevron Corporation (CVX - Free Report) recently reported its second-quarter 2024 earnings, which fell short of expectations primarily due to weaker natural gas realizations and reduced margins on refined products. Although the company missed bottom-line forecasts, its revenues surpassed expectations, partially mitigating the disappointment.
Chevron achieved an impressive 11% year-over-year increase in production, setting a new quarterly record in the Permian Basin. This robust volume, driven by efficient development strategies, technological advancements and the ongoing integration of PDC Energy assets, positions Chevron to capitalize on any strength in oil price, potentially boosting revenue and stock price.
However, it is not an understatement to say that the market has not been impressed with the company this year. In 2024, the San Ramon, CA-based integrated company's stock has lost 4% against the S&P 500’s climb of 8.9%. During the same period, the Oil/Energy space and its subindustry have declined 1.2% and 3.5%, respectively.
YTD Price Comparison
Given CVX’s underperformance and the recent earnings miss, there appears to be a lack of direction in the investment community. But all is not bad here, as the case for Chevron isn’t weakening. It remains one of the best-positioned global integrated oil companies to achieve sustainable production growth and boast an impressive business model.
A Look at Chevron’s Major Drivers
Long-Term Investment Potential: Chevron’s long-term projects and investments in the oil and gas sector are designed to yield benefits over years or even decades, not quarters. This long-term horizon can provide substantial returns despite short-term market fluctuations. For investors with patience, Chevron's strategic positioning can result in significant future gains once the current market volatility subsides.
Robust Production Growth in Key Assets: Chevron's production growth is impressive, with domestic output driven by the Permian and DJ Basins. Full-year Permian volumes are expected to grow by 15%, with Q4 production anticipated around 940,000 barrels per day. Then, Chevron’s buyout of PDC Energy is already driving substantial production growth in the DJ Basin. The company's anticipated 4-7% production increase in 2024 makes Chevron an attractive investment.
Strong Financial Base and Dividend Yield: Chevron maintains a robust financial structure with a significant shareholder payout. The company's dividend yield of above 4% is attractive, particularly for income-focused investors, offering a steady income stream even when share prices are stagnant.
Hess Acquisition: Chevron's impending $53 billion takeover of Hess Corporation (HES - Free Report) and its increased investments in key areas like the Permian Basin and Guyana position it for enhanced production and growth. These strategic moves are likely to pay off in the next few years, providing a solid foundation for future revenue and production increases.
Capital Expenditure and Production Growth: Chevron’s commitment to increasing capital expenditure since 2023, coupled with expected production growth in 2024, highlights its focus on future expansion and efficiency. These investments are crucial for sustaining long-term growth and enhancing shareholder value.
Industry-Leading Return on Capital: Despite the recent performance issues, Chevron remains a leader in return on capital employed (ROCE). This metric is crucial for evaluating the efficiency and profitability of a company. Chevron's industry-leading ROCE suggests that it is well-managed and capable of generating substantial returns on its investments.
While Chevron has strong long-term potential, the current market conditions and specific challenges facing the company cannot be ignored.
Risks for the Stock
The ongoing volatility in oil prices due to recession fears and indications of weak Chinese demand, poses significant risks to short-term performance. The broader energy sector is experiencing a period of uncertainty with potential over-supply concerns and fluctuating consumption.
Moreover, the company's valuation remains relatively high, which means the stock might not offer an attractive entry point at this time. Chevron's forward earnings multiple is significantly higher than most of its peers. Despite strong financial performance, the elevated valuation indicates that Chevron is expensive relative to other major oil companies, especially the European ones like Shell (SHEL).
Chevron's downstream segment is experiencing margin compression. In the second quarter of 2024, downstream earnings fell due to lower refining margins and increased operational expenses. With WTI prices expected to stay around $80 per barrel, downstream margins may remain constrained. This could affect Chevron's ability to capitalize on refining operations and reduce overall profitability, especially if refining margins continue to narrow.
Finally, Chevron's planned acquisition of Hess Corporation faces regulatory scrutiny and legal challenges from ExxonMobil XOM, which claims preemptive rights over the Hess stake, potentially delaying the merger's completion. This uncertainty around the deal's completion, which now looks to drag well into 2025, introduces a significant risk factor.
Final Word
Undoubtedly, Chevron is a quality business with a fairly impressive inventory of upstream development projects that will drive production growth in the long run. As one of only two energy stocks on the list of Dividend Aristocrats, the supermajor’s balance sheet is also reasonably healthy, indicating that the dividend should remain safe going forward.
At the same time, investors should note that any dip in oil prices is going to hurt Chevron, whose production profile is heavily tilted toward crude. It has also been facing some headwinds on the Hess merger front. Combined with a stretched valuation, it will be prudent for investors to wait for more clarity and stability before taking a position in the stock.
The stock currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.