Please ensure Javascript is enabled for purposes of website accessibility

Why Chevron's Stock Looks Attractive

By Rekha Khandelwal - Feb 20, 2020 at 7:22AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Chevron stock is trading at a very attractive yield. But that is not the only factor that makes this energy giant attractive.

Falling oil prices and dismal fourth-quarter performance have sent stock prices of energy giants down. Chevron (CVX -0.26%) was no exception. However, if you're too much focused on the short-term factors, you may miss the impressive long-term performance of the company. There are reasons to be optimistic about the company's future performance as well.

Strong operational performance

As expected for commodity-based companies, Chevron's revenues and net income growth isn't consistent over the years. Commodity prices and one-off charges impact the company's top and bottom lines. However, Chevron's operational metrics have shown consistent growth over the years.

oil rig and ship

Image Source: Getty Images

Chevron's total oil-equivalent production has been steadily rising in the last three years. It's oil-equivalent production rose by 4% in 2019 and exceeded 3 million barrels per day for the first time the company's history. While the production is rising, Chevron is making sure to not only replenish but also add to its proved reserve balances. In 2019, it added around 494 million barrels of net oil-equivalent proved reserves.  More importantly, Chevron expects its production to keep growing at an average annual rate of 3%-4% over the next four years.  

Chevron's reserves and production

Image source: Chevron. Chart by author.

In the downstream segment, sale of certain South Africa assets and lower margins on refined products sales impacted Chevron's earnings in 2019. However, the company's adjusted downstream earnings per barrel compare favorably among its competitors.  

Chevron's strong operational performance has helped it in generating enormous operating cash flows. Moreover, its disciplined approach to capital investments means that it has lots of free cash to return to its shareholders. Notably, the company expects to keep growing production, without much of additional organic investment. Chevron is focusing more on investments with short cycle, but with higher and sustained returns. This has made its capital program more efficient. For 2020, the company expects to spend $20 billion on capital projects -- the same amount as it spent in 2019.

Conservative leverage

Chevron's positives don't end there. The company's net-debt-to-capital ratio is the lowest among its peers. It's conservative leverage positions it well for any oil price environment. Moreover, Chevron reduced its debt by more than $7 billion in 2019.

Chevron's strong free cash flows enable it to return value to shareholders in the form of dividends and share repurchases. In 2019, Chevron returned $13 billion to its shareholder via dividends and share buybacks.  It expects share repurchases of $5 billion every year in the coming years.

Attractive valuation and yield

Chevron stock looks attractive based on relative valuation. Chevron is trading at a forward EV-to-EBITDA multiple of around 5.7 times, which is lower than that for ExxonMobil (XOM -0.93%) . Like the energy sector, the two stocks are also undervalued relative to the broader markets. As the sector's long-term demand and supply factors comes more in sync, its valuation should improve.

CVX Chart

CVX data by YCharts

Finally, Chevron offers a very attractive yield. The company has increased its annual dividends consecutively for the last 32 years. Conservative leverage, strong free cash flows, and a solid track record of dividend growth make Chevron's attractive yield safe too. All in all, there are more than one reason to be excited about this stock currently.

Rekha Khandelwal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chevron Corporation Stock Quote
Chevron Corporation
CVX
$156.41 (-0.26%) $0.40
Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$91.46 (-0.93%) $0.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.