Chevron (CVX 0.09%) stock reached a new all-time high on Monday and is now up 58% year to date (YTD). The energy sector continues to be a rare bright spot in an otherwise turbulent market in which the S&P 500 was recently down over 19% YTD and the Nasdaq Composite over 32% YTD.

Yet the energy sector -- thanks to years of undervaluation, improved financial responsibility, and soaring profits -- arguably deserves to be outperforming the broader market.

Chevron's third-quarter 2022 results, which were reported before market open on Oct. 28, were incredibly impressive. Chevron is delivering on its promises to investors. And even if the stock cools off, it's still an excellent buy now. Here's why.

An oilfield worker operating a pump at a drilling site.

Image source: Getty Images.

A blowout quarter

Strong oil and gas prices paired with Chevron's low cost of production led to phenomenal results. Chevron posted $5.78 in diluted earnings per share (EPS) -- 81% higher than its Q3 2021 diluted EPS of $3.19. Chevron raked in $29.1 billion in net income in the first three quarters of 2022 alone. Without even factoring in what is likely to be a strong fourth quarter, Chevron has already surpassed its all-time high net income record of $26.2 billion from 2012.

CVX Net Income (Annual) Chart.

CVX Net Income (Annual) data by YCharts.

What's more, Chevron posted its sixth consecutive quarter of over $5 billion in free cash flow (FCF). When 2022 is said and done, Chevron expects to surpass its annual FCF record of $21.1 billion, which was achieved in 2021. 

Record results coinciding with a record stock price aren't surprising. However, Chevron's excellent results aren't solely the product of solid oil and gas prices. Rather, Chevron's efficient spending and high return on capital employed (ROCE), paired with its financial discipline, have allowed the company to benefit from higher oil and gas prices while also protecting against the downside when prices fall.

For the quarter, Chevron achieved a 25% ROCE compared to a five-year median ROCE of 6.6% and a 10-year median ROCE of 7.7%. ROCE is a useful financial ratio to use for oil and gas companies because it tells investors the effectiveness of capital allocation for achieving profits. And since the oil and gas industry is incredibly capital-intensive, efficient use of capital is paramount.

Chevron passed the 2020 stress test

During its Q3 2022 earnings call, Chevron reminded investors that it was the only company that showed a stress test at Brent crude oil prices of $30 per barrel during the beginning of the COVID-19 pandemic. The results speak for themselves, as Chevron finished 2020 with positive FCF and lost "just" $5.5 billion -- the least amount of money of the five largest oil majors (ExxonMobil, Shell, TotalEnergies, and BP). For comparison, ExxonMobil lost four times more at a staggering $22.4 billion. 

Today, Chevron maintains the best balance sheet of the oil majors. It has the lowest financial debt-to-equity ratio, debt-to-capital ratio, and the lowest total net long-term debt despite Chevron being the second-largest oil major by market cap and middle of the pack when it comes to revenue and net income. 

CVX Financial Debt to Equity (Quarterly) Chart.

CVX Financial Debt to Equity (Quarterly) data by YCharts.

Prioritizing stability over growth

For the past few quarters, analysts have continued to question Chevron's decision to keep a lid on spending or not repurchase more of its own stock as its balance sheet is already in excellent shape. Although Chevron has invested heavily in the Permian Basin and averaged over 700,000 barrels of oil equivalent per day (BOE/D) out of that region alone, its overall production was essentially flat relative to Q3 2022 due to contract expirations. Chevron could see production tick up at a low to mid-single digit pace as it works toward boosting Permian production to over 1 million BOE/D by 2025. 

The company has been adamant about prioritizing the quality of its oil and gas portfolio by lowering its average cost of production, not necessarily growing production overall. "The goal here is to sustain and grow the enterprise with the lowest capital possible," said Chevron CFO Pierre Breber on the Q3 2022 earnings call. "We're more capital- and cost-efficient than we've ever been. We've talked about that. And we're not really paid for growth by the market." 

Chevron isn't merely focused on capital discipline to protect against downside risk. It's taking it a step further by saying it isn't awarded for growth by the market.

In many cases, Chevron makes a good point. Oil and gas companies tend to get punished on the downside for overexpanding during boom times. Instead, they get rewarded for maintaining consistent dividend raises, keeping a healthy balance sheet, and supporting their dividends with FCF. This has been the recipe for Chevron, and it's worked out well.

Chevron is not only a Dividend Aristocrat that has paid and raised its dividend for 35 consecutive years, but it has also been the best-performing stock of the top five largest oil majors in terms of total return over the last five-year period and the last 10-year period. Not to mention it joins ExxonMobil as the only oil major that has outperformed the S&P 500 over the last five years.

CVX Total Return Level Chart.

CVX Total Return Level data by YCharts.

Another important point is that Chevron has set environmental, social, and governance (ESG) goals that can't be achieved if it grows its carbon footprint. In fact, many of the company's recent acquisitions or strategic decisions are centered around alternative energy and working toward lowering its emissions. It completed its acquisition of Renewable Energy Group in June, which makes Chevron the second-largest biorenewable diesel producer in the country. 

A reliable energy stock that's built to last

An investment in Chevron is so much more than an oil and gas play. The company's track record for financial discipline speaks for itself. Its emphasis on production quality over quantity reduces downside risk. Even after the recent gain in its stock price, Chevron stock still has a dividend yield above 3%. And given the company's focus on staying a Dividend Aristocrat, investors can count on Chevron to keep raising the dividend no matter the market cycle.