The energy industry is getting hit hard today by the impact of COVID-19, leading even the stocks of the best names in the industry to flounder at low levels. That, however, could be an opportunity for long-term dividend investors looking to buy while others are fearful.
But you need to choose wisely. Here are four charts that show why integrated energy giant Chevron (NYSE:CVX) should be on your energy short list.
1. A whole lot of pain
There's no point trying to sugarcoat the situation. The economic shutdowns used to slow the spread of COVID-19 led to a material decline in demand for oil and natural gas. In fact, for a brief moment, oil prices fell below zero, meaning that drillers were paying customers to take their oil. There were technical reasons for this historic event, and oil prices have since recovered from that nadir, but it highlights just how bad the situation is today.
However, that backdrop provides the story behind the first chart here. It's hard not to grimace when looking at the picture, which shows that Chevron's stock is down by around 30% so far in 2020. What's perhaps more upsetting is that this makes it one of the best performing stocks within the integrated energy peer group. For example, Royal Dutch Shell is off by over 50%!
That said, if you believe that oil will remain a vital part of the energy mix for decades to come (like Chevron does), then the industrywide price declines could be a buying opportunity.
2. A historically high yield
Just how good an opportunity could it be? Taking a look at Chevron's historical dividend yield trend, which can be used as a way to assess valuation, provides a very compelling story.
As the chart below shows, Chevron's yield is near the highest levels seen over the past 30 years. Notably, the dividend has been increased annually over that entire span, so there are no dividend cuts to distort the picture.
While times are tough today, the energy giant's management team has been resolute in its intention to support the dividend. In fact, during Chevron's second-quarter 2020 earnings conference call, the CFO placed paying the dividend among the company's top financial priorities. The goal is to get to a point where the company can support the dividend even if oil remains in the $40 per barrel range.
3. In a better financial position than peers
To be fair, Chevron's ability to maneuver in the current market is being hindered by low oil prices. However, that's true of all of its peers, as well, which is what makes the next chart so important. Chevron's balance sheet is in much better shape to deal with adversity than its competitors, with a debt-to-equity ratio of just 0.25 times.
That's not only the best in the group, but also less than half the number seen at some of its European peers. There's a counter-argument here in that European energy names tend to carry more debt but also notably more cash.
However, when times get tough, companies are loath to spend that cash and reluctant to add more debt. Having low leverage, like Chevron, simply provides more flexibility to deal with the type of adversity the industry is facing today.
4. Circling the wagons
Not only is Chevron's balance sheet in better shape, but it also has been more aggressive than most of its integrated peers in reducing spending. As the chart below highlights, Chevron's capital spending has fallen by a third so far in 2020, second only to the reductions at Italy's Eni.
Although that may sound like Chevron is setting up for production issues in the future, it's actually benefiting today from investments it made in the past. So it came into this period with a relatively strong production profile and, notably, among the lowest capital spending needs of its peer group. Once again, it looks like Chevron stands out from the pack.
Important to this discussion, however, is the fact that Chevron has a material position in the U.S. onshore drilling space. This production is relatively easy to ramp up and down based on market conditions. Assuming energy prices do recover, Chevron can act just as quickly to restore spending as it was able to act to curtail spending. When everything is taken into consideration, Chevron is in a pretty good position on the production and spending front to adjust along with the market.
There's a lot to like here
The picture here is pretty clear: Chevron is holding up well financially, despite the fact that the energy sector is deeply out of favor. That, however, hasn't stopped Mr. Market from putting Chevron on the sale rack along with peers.
Chevron has a historically high yield, so long-term dividend investors who believe that oil will remain an important global fuel for years to come should take the time to get to know the company. Today, it truly stands out from the pack.