For most investors, the value proposition for buying shares of a company like Chevron (NYSE:CVX) is that it's a relatively stable investment that handles the ups and downs of the commodity cycle without too much trouble and pays a nice dividend, to boot. So far this year, though, the stock has not been the bastion of stability, as shares have declined more than 15% in 2015 and are off close to 30% since the price of oil started trending downward in August of last year.
While I can't say with any certainty where prices will go from here, it's worth looking at both the bull and bear sides of the argument. So let's take a look at three factors that could keep Chevron's stock in the red for a while longer.
Oil price weakness takes a bigger bite from Chevron
It's pretty easy to lump companies like Chevron and ExxonMobil (NYSE:XOM) in the same sentence because their business models are pretty similar, but there are some small differences between these companies that make them unique. One that stands out is the fact that Chevron's success is much more directly tied to the exploration and production side of the business than are ExxonMobil and other integrated oil majors out there. The chart below shows how much of each company's revenue comes from exploration and production. Keep in mind that these are revenue numbers, not earnings.
|Company||% Revenue From Upstream Operations|
The reason I'm using revenue here instead of earnings is because earnings figures vary much more based on commodity prices, but revenue breakdowns by segment stay much more consistent on a quarterly and annual basis. As seen here, Chevron's production side of the business is a larger aspect of the overall business in comparison to its peers, and as you can imagine, it's the production side of the business that suffers more when oil and gas prices are low.
While it's hard to extrapolate quarterly results for a company this size, there was one aspect that really stuck out last quarter. Chevron's U.S. production operations lost $460 million, which suggests that in today's price environment, it isn't too effective at generating a return. Contrast that with ExxonMobil, which came close to breakeven on its U.S. operations -- it lost $52 million last quarter, but that's pennies for companies this size.
With Chevron's business fate tied closer to the production side of the business and some weakness in generating positive returns at today's prices in some segments, it might continue to struggle.
Bad timing for a lackluster LNG market
Chevron made some very, very large bets on LNG exports years ago with the expectation that demand for natural gas would be robust for years to come. The one thing that the company probably didn't anticipate when it made those investments was that the U.S., of all places, would become a major player in the export game.
Today, its $54 billion Gorgon LNG facility is getting ready to ship its first cargoes, and the upside is that the company has a touch over 75% of the facility's capacity under long-term purchase agreements. The downside, however, is that the current spot price for LNG cargoes -- $7.20 per million BTU -- is well below the set purchase price on these contracts -- about $10.20 per mmBTU based on current prices for Brent oil. So all of that excess capacity could be going into an already oversupplied market, making the returns on its LNG facilities not what it was hoping for.
This could just be a short-term thing, since the company anticipates that international LNG demand will outpace all LNG export facilities in operation and under construction within a decade.
That said, a continued lull in LNG prices over the next couple of years could make its LNG bet not look like the slam dunk it was just a few years ago.
Continuing cash crunch
Over the past couple of years, Chevron has been spending a ton of money on new devlopment projects, most notably that Gorgon facility, and that big project bill has been eating up capital left and right. Since the beginning of 2013, its capital expenditure budget has blown by the amount of cash coming in from its operations. This is in pretty stark contrast to some of its peers that have displayed a bit more financial discipline and have kept their cash from operations in excess of their capital needs.
|Company||Cash From Ops as % of Capital Expenditures|
This is obviously not a situation that can happen perpetually, because Chevron is needing to either sell older assets or take on debt to cover these expenditures. Granted, it is still in very good financial health, with a AA credit rating and a low debt-to-capital ratio, but eventually the company will have to start turning cash flow positive, especially since its cash from operations is expected to get even smaller at today's oil prices.
It should be able to turn the corner on its capital budget as mega-projects such as Gorgon go operational, but if it doesn't, investors could soon look at this cash-generation issue as a sign of weakness and look to some of Chevron's competitors.
What a Fool believes
Chevron as a company isn't at risk of default or anything like that, but that doesn't mean it's immune to the market. Continuously low oil prices, a weaker-than-expected LNG market, and an overambitious spending habit leading to a lack of cash are all reasons that Chevron's stock might not perform as well as some might hope. The biggest thing that investors should watch is how much its spending reduces as many of these mega-projects go into operation. This will answer a lot of questions regarding its future for the next couple of years.