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My Top Oil Stock to Buy Right Now

By Justin Pope – Aug 26, 2021 at 9:01AM

Key Points

  • Renewable energy sources are gaining steam, but oil and gas will not go away anytime soon.
  • Chevron is an integrated oil major with the financial strength to work through the pandemic and low oil prices.
  • The recovery in oil has boosted profits, and the company remains undervalued given its positive momentum.

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Chevron's fundamentals make it a top oil stock in the evolving energy industry.

Fossil fuels have driven the energy industry for hundreds of years. Thanks to technological advancements, our energy mix is starting to trend toward more and more on renewable energy sources like wind and solar power. Integrated oil giant Chevron (CVX -2.47%) is one of the largest oil companies in the world, and while renewables will play a huge part in the future, here are three reasons why Chevron could still be a great investment today.

1. Energy is evolving, but oil still has its place

Oil companies have long powered our world, but that is steadily changing. Climate change has pushed society to seek out cleaner methods for generating energy. Renewables like wind and solar have been around for years; adoption has been slow because of the higher costs of renewable energy.

As technology improves, renewable energy has become less expensive over time. According to the National Renewable Energy Laboratory, renewable energy costs have fallen to $0.03-$0.06 per kilowatt-hour versus $0.05-$0.17 for fossil fuels. Renewable energy is now rapidly growing, and in countries like the U.S., the majority of new energy projects are wind and solar power.

Oil pump working under the sky.

Image source: Getty Images.

Despite this pressure on fossil fuels, the demise of oil and gas is likely overstated. The U.S. Energy Information Administration energy outlook projects that by 2040, energy sourced from coal will see the largest decline in usage. It's expected that natural gas will continue to play a significant role in energy production, while oil will depend on how quickly electric vehicles are adopted worldwide. It is widely agreed that oil and gas will be in demand for at least the next 10 years or more, and the transition to renewable energy will be a slow, seismic shift.

2. Gaining strength with oil recovery

Chevron is what is called an "integrated" oil and gas company, which means it participates in all three phases of production:

  • Upstream (exploration)
  • Midstream (storage and transport)
  • Downstream (refining and retail)

Oil companies are sensitive to the price of oil. Upstream companies, those that deal solely in the discovery of crude oil, will be severely impacted when the price of crude oil drops. Chevron's business is diversified across the entire oil and gas industry, so it is more stable as oil prices go up and down over time. Still, oil prices can have an impact on Chevron's financials.

After oil prices suffered during the outset of the pandemic, Chevron's business has recovered thus far in 2021. Its second-quarter earnings for 2021 showed improvement, with revenue increasing 180% year over year to $37.5 billion. After the business posted losses in 2020, Chevron has posted a net income of $4.4 billion through the first half of this year, thanks to a recovery in oil prices.

3. A large dividend with plenty of support

The pandemic was a unique event, but world events impact oil prices from time to time. Because its business is sensitive to oil prices, management must operate the company to protect investors from these tough times.

One of the telltale signs of Chevron's strong management is how the company handles its balance sheet. Among the major integrated oil companies, including Chevron, ExxonMobil, BP, and Royal Dutch Shell, Chevron has the lowest debt-to-equity ratio at just 0.21 and carries $7.5 billion in cash.

Oil prices were especially volatile in 2020, even going negative for the first time in history. Chevron saw a serious decline in its business, posting a net loss of $5.5 billion, $4.5 billion of which was a non-cash charge for a write-down on its oil and gas reserves. Despite this, the company generated $10.6 billion in operating cash, enough to fund its dividend payout for shareholders. Through asset sales and balance sheet management, Chevron was able to pay for any needed expenses to run the business.

Having this kind of financial safety net has enabled Chevron to raise its dividend payment 34 years in a row, through the ups and downs of the oil industry. Today, investors get an annual total payment of $5.36 for each share they hold, a dividend yield of 5.5% on the current stock price.

Why Chevron's a buy today

Chevron's stock has yet to recover to pre-pandemic levels, but the business itself is showing strong momentum. The company generated a free cash flow of $11.2 billion from its operating activities through the first six months of 2021, enough to cover the dividend and start a buyback program.

Revenue is expected to hit $147 billion for the full 2021 year, a 56% jump over 2020, which would exceed Chevron's 2019 revenue. Lastly, the company's current 5.5% dividend yield is well above its historical average of 3.75%, so investors can currently get more dividend income from shares than is typical. Chevron is a great idea to consider for a solid, undervalued stock that can pay a steady income.

Justin Pope 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.

Stocks Mentioned

Chevron Stock Quote
Chevron
CVX
$176.56 (-2.47%) $-4.47
Exxon Mobil Stock Quote
Exxon Mobil
XOM
$106.85 (-2.74%) $-3.01
Royal Dutch Shell plc Stock Quote
Royal Dutch Shell plc
RDSA
Bp P.l.c. Stock Quote
Bp P.l.c.
BP
$35.00 (-1.02%) $0.36

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

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