Oil and gas giant Chevron (CVX 0.37%) is a well-known dividend stock and a staple in global energy. Despite operating in energy, where up-and-down commodity prices can impact business, Chevron has consistently put cash in its shareholders' pockets.
Today Chevron faces more uncertainty. Oil prices have dropped, and the company's working through a massive acquisition that's facing potential geopolitical trouble. The result is a stock trading near its 52-week lows.
Should investors lean into the fear and buy the stock? Here is what you need to know.
Oil prices are falling
Investors are probably looking for clarity around two dark clouds over Chevron. First, oil prices are falling. Oil has trended lower since early 2022, when inflation peaked. This is despite OPEC, the organization of petroleum-exporting countries, voluntarily cutting production to support market prices. There are also two wars happening simultaneously, one in the Middle East. Oil prices typically rise under these circumstances, but they're dropping.
Why? The economy may not be as strong as some think. While consumer spending remains solid, setting a new sales record on Black Friday this year, manufacturing could be struggling. The ISM Manufacturing Index, which measures U.S. manufacturing activity, has contracted for 13 consecutive months and is now below levels from nine of the past 12 recessions.
Brent Crude Oil Spot Price data by YCharts
Investors should note that Chevron can fund its operations and dividend at an average oil price of $50 per barrel. However, price declines will naturally stunt earnings, which has eroded the market's sentiment toward Chevron stock.
Drama in Guyana
Chevron is navigating a massive acquisition against the backdrop of falling oil prices. It agreed to acquire Hess Corporation in an all-stock deal worth $53 billion this fall. A primary motive for the acquisition is the Stabroek block in Guyana, an offshore asset with an estimated 11 billion BBOE (billion barrels of oil equivalent) in gross recoverable resources.
Hess is currently generating 110,000 BOE per day in Guyana from two FPSO vessels, with three more in development and a potential for ten. Management believes that could last into the 2030s, not counting additional future discoveries. Notably, the Stabroek block is very profitable. Last year production costs in Guyana were only $11.23 per barrel, less than half of production in U.S. assets.
However, Venezuela is attempting to claim the Strabroek block as part of a long-standing territory dispute that heated back up after Guyana's significant oil discoveries in recent years. Tensions reached the point that the U.S. conducted military drills with Guyana in preparation for a potential escalation. Fortunately, the two countries met in the last few days and agreed to keep the peace.
It's an important step, but investors should monitor the situation in case tensions flare up. Potential political instability is never good, especially at the center of a $53 billion acquisition. Any conflict could slow or diminish productivity in Guyana, or even jeopardize the merger.
What to do with Chevron stock
The stock is trading toward the high end of its historical price-to-book value ratio over the past decade, though it has fallen from its high. The company's generating free cash flow on nearly ten percent of its revenue, and its return on equity is near its highest levels in a decade.
On one hand, you could argue that Chevron is earning its higher valuation. However, these fundamentals could deteriorate if oil prices continue falling. The good news is that Chevron is financially prepared for turbulence. The company's debt-to-equity ratio is the lowest since coming out of the financial crisis in 2008-2009. In other words, the balance sheet hasn't looked this strong in years.
CVX Return on Equity data by YCharts
Ultimately, nobody can predict what the markets will do, where oil will trade, or how geopolitical conflicts will be resolved. It seems that oil is trending lower, especially considering the prolonged weakness in manufacturing. Chevron's strong fundamentals instill long-term confidence, but the short-term share price could be volatile.
Buying a little bit at a time would be the smart move. That way you'll continue building an investment, lowering your cost if shares continue to fall.
