When it comes to the energy sector, a few names stand above the rest, and Chevron (CVX 0.80%) is one of them. With a massive $285-billion market cap, it is easily one of the largest oil and natural gas producers on the planet. And it has a long history of operational success and dividend growth. It's a great energy option, but only if you are thinking long-term. Here are three reasons you might want to buy it and one reason to avoid it.
1. Diversified portfolio
Although oil and natural gas prices are the biggest driving force behind Chevron's top and bottom lines, its business is spread across the energy landscape. That includes everything from upstream drilling operations to downstream chemical and refining businesses. It provides a bit of balance to results, often softening the blow when energy prices drop. This is notable because commodity prices are volatile and often move in a dramatic fashion. Having an offset, even if modest, helps smooth out performance over time.
2. Financial strength
Another notable facet of Chevron's business is that management has long focused on having a rock-solid balance sheet. To put a number on that, the oil giant's debt-to-equity ratio is around 0.2 times today. That's lower than all of its closest peers.
The importance of this is that having low leverage allows Chevron to lean on its balance sheet during energy downturns so it can continue to support its capital investment plans and dividend (more on dividends in a second). For example, the 2020 pandemic downturn in oil prices pushed Chevron's debt-to-equity ratio up over 0.3 times, a trend that has since reversed now that the energy sector is again in an upturn. Clearly, the flexibility low leverage provides has been used to good ends.
3. Reliable dividends
This brings the story to Chevron's dividend, which has been increased annually for over three decades. That makes the company a Dividend Aristocrat. If you are a dividend investor looking for some energy exposure, the 3.9% yield here, coupled with the strong payment history, should be pretty enticing.
It wouldn't be fair to leave it at that, however. Oil and natural gas are highly cyclical and, as noted, prone to dramatic price swings. For Chevron to have amassed this type of dividend record is quite remarkable. It shows management's commitment to shareholders, and that deserves a special highlight.
While these are all strong reasons to buy Chevron, there is one reason you may not want to. Oil and gas prices are relatively high today and the stock, while off of recent peaks, is still up materially from its pandemic lows. Since oil prices remain fairly elevated, there is potentially more downside risk for the stock over the near term than upside potential.
The company is, basically, built to navigate the long-term ups and downs of the sector, specifically blunting the near-term gyrations. It is a core energy holding that won't maximize the upside like a pure-play producer such as ConocoPhillips (COP 0.16%) would. Chevron is just not the type of investment that you'll want to own if you are looking to time oil price moves.
There's no doubt Chevron will benefit from rising prices, just not to the same degree as a name like ConocoPhillips. And while Chevron will protect you, to some degree, on the downside, that's not exactly the point if you are trying to time energy price moves. If you expect an oil decline, shorting a stock like ConocoPhillips would probably make more sense than shorting Chevron.
A long-term hold
At the end of the day, Chevron is built to be a long-term investment in the energy sector. That's why it has a diversified business model and strong finances and pays extra attention to rewarding investors with dividend increases. However, all of those traits generally mean it isn't an ideal way to play near-term oil price moves since Chevron won't maximize the upside or downside with its steady-hand approach. If you are looking to add an energy name to your otherwise diversified portfolio, Chevron could be a strong option, but only if you are looking to hold onto it for a long time.