When it comes to the energy sector, Chevron (CVX 3.84%) is probably one of the most boring companies you can find. And that's actually a huge selling point today, since energy prices have already rebounded strongly from their low point during the darkest days of the coronavirus pandemic in 2020. Here's why this integrated energy giant should be on your short list if you are looking at buying shares of an oil company today.
1. A little up, a little down
The energy sector is highly cyclical, with often dramatic oil and natural gas price moves leading to equally shocking stock price moves for industry participants. That's not good or bad, it just is. However, if you don't take this fact into consideration when investing in an energy stock, you are likely to be surprised when the tides inevitably turn.
NYSE: CVX
Key Data Points
Right now oil and natural gas prices are relatively high, so a lot of energy companies look like rock stars. If history is any guide, that won't last forever, and you'll want to own a stock like Chevron that tends to be less volatile over time. Sure, that means it won't participate as much on the upside, but saving yourself from huge losses can easily make up for that.
A comparison will help. Kosmos Energy (KOS 7.37%), a small offshore oil driller, is up around 4% since the start of 2020. Chevron is up 28%. That period, however, saw a pandemic-period decline of around 90% in Kosmos Energy's shares followed by a price increase of more than 430%. Chevron's decline was big, at around 50%, but that's a far cry from 90% and clearly helped it outperform its smaller peer over the total time frame despite a more muted 85% upside performance. Sometimes slow and steady really does win the race.
2. Something to lean on
One of the keys to Chevron's long-term success is its conservative approach. That starts with its integrated business model, which includes oil and natural gas production, midstream assets like pipelines, processing and refining businesses, and, of course, gas stations that dispense fuel to end customers. Essentially, it's diversified across almost the entire energy industry value chain.
Although oil and natural gas prices are the main driver of performance, some areas of the business (specifically refining) tend to benefit from low energy prices. So there's something to offset the pain of low commodity prices. This, however, is just part of the story.
The company's conservative nature flows all the way through to its balance sheet. At the moment, Chevron's debt-to-equity ratio is the lowest among its closest peer group at 0.17 times. That would, in fact, be low for any company. But what it gives Chevron is the freedom to take on debt during difficult times so it can continue to invest in its business and support its dividend.
CVX Debt to Equity Ratio data by YCharts
3. Collecting checks
Dividends are more important than you might think. Chevron is a Dividend Aristocrat with 35 years and counting worth of annual dividend increases behind it. That's an incredible record given the ups and downs the energy sector has seen over that time span. Clearly, returning value to investors via a growing dividend is important to the company.
That, in and of itself, is a good thing. But as an investor, being able to collect a sizable dividend (the current dividend yield is around 3.6%) during periods when emotions are driving Chevron's stock lower can't be ignored. Those quarterly checks will help to keep you invested so you can benefit from the inevitable industry upturn. Remember that performance comparison with Kosmos Energy above. If you jumped out during the downturn, you would have missed the full cycle benefit of owning a company like Chevron.
Times are good, but it won't last
Chevron's earnings totaled $11.6 billion in the second quarter of 2022, up from nearly $3.1 billion a year earlier. That's a testament to just how good things are today in the energy business. Other energy companies are doing just as well, but you shouldn't expect these incredible results to last for very long. History is very clear here; a downturn will eventually arrive and push financial results, and energy shares, lower again. If you are looking at energy stocks today this is the worst-case scenario you should be preparing for with your stock picks. A conservative integrated energy giant, Chevron is probably one of the best positioned to deal with the inevitable headwinds that will come.
