Is Chevron Stock A Sell?

Chevron Corporation (NYSE:CVX) is an American energy corporation with an international reach in over 180 countries around the globe. It is a vertically integrated company involved in oil and natural gas, from hydrocarbon exploration and production to refining, transport, marketing, and power generation.

A discounted cash flow forecast analysis of Chevron financials suggest the company is almost fully valued, so is Chevron stock a Sell?

Prior to the pandemic, CVX share price reached a high of $122.72 before plummeting to $51.60. At its current level, it still has plenty of upside before breaking through its former ceiling to reach new highs.

The company has a solid recovery plan, and it could outpace rival ExxonMobil (NYSE:XOM) and the broader oil industry. Chevron took on debt to fund its dividend payments in 2020, but it’s still sitting well with OPEC gradually increasing global oil production and travel picking up over the next year.

Let’s gas things up to see if Chevron stock will be in Drive, Neutral, or Reverse over the coming decade.

Why Did Chevron Drop?

Chevron (CVX) and the entire gas and oil industries were hit hard by reduced demand for oil as the world came to a grinding halt.

CVX market capitalization was quickly sliced in two and remained constrained by widespread stay-at-home orders. Work, school, and play went virtual, and airlines closed, dropping oil barrel prices into the negative for the first time in history.

Chevron’s valuation took a turn for the worse heading into the Fall, as uncertainty grew about the prospect of an economic recovery. It provided two great opportunities to buy low for those who believe in the company, and there’s good reason to be optimistic.

For the FY 2021 year, analysts project that each quarter will be better than the last when it comes to top line revenues.

Although it could be several months before the economy reopens and perhaps years before it fully recovers, the writing is on the wall that the future is brighter than the past for Chevron stock.

So, there’s still plenty of room for growth in Chevron’s share price for those willing to take a risk.

Is Chevron Stock A Sell?

The picture is not all rosy for Chevron. Applying a discount cash flow analysis to CVX financials reveals that its market capitalization of $174 billion is close to being fully valued. 

Certainly on the plus side, November was a great month for oil investors, as the economic recovery brought stocks up 40 to 50 percent across the industry board. In the minus column even though Chevron is close to returning to pre-pandemic levels, it also has more debt than in 2019, with its debt-to-equity rising from 0.20 to 0.26 during the third quarter alone.

Bullish analysts believe Chevron can overtake ExxonMobil in the next year as the energy sector leader. This is due to investments in a diversified portfolio of upstream and downstream hydrocarbons, as well as alternative energy resources.

For investors you missed the initial upswing, there could be two more positive share price catalysts coming in the next quarter. (1) Full FDA vaccination approval and distribution could elevate the overall stock market, and (2) a new economic stimulus plan coming from Washington.

Chevron Lost $3 Billion & Suspended Share Buybacks

Although the economy is recovering, Chevron has a big hole to dig itself out of. It lost $3 billion in the second quarter of 2020 during the pandemic struggles. As a result, management suspended share buybacks, which in turn cut the company’s market cap. It didn’t help that the company’s operating revenue and sales are down by half.

It could take a full year from now, perhaps even longer, before the global economy returns to normal. That’s a long time to wait on an investment, and there’s going to be plenty of instability in the meantime.

OPEC is pushing to gradually increase oil production in order to keep the market on an even playing field. It’s a big ask that includes a lot of countries in the Middle East, along with China, Russia, and the United States, among others. Chevron’s market price is heavily impacted by crude oil prices, and the oil commodities market can be brutal.

Oil isn’t an investment for the weak of heart, and it can experience turbulent gains and losses, even within a day. However, the overall price of oil has been on an upswing for the back half of 2020. This gives bullish investors a reason to believe Chevron stock can recover.

Will Chevron Stock Recover?

Chevron’s recovery could be slow, but it has plenty of room to get there. The company still has over $6.89 billion in cash in hand for the quarter. Rising oil prices means it could easily have boosted its liquidity reserves heading into the fourth quarter. And with winter upon us, demand for shale gas will go up for heating purposes.

Should holiday travel be a busier season than forecast, oil stands to recover faster than airlines and hotels. People may carpool for a road trip over buying airplane seats, but there is still plenty of holiday travel planned. The next few quarters could be bigger ones than analysts expect for Chevron, but its future is less clear thereafter.

Is Chevron Stock a Sell? The Bottom Line

Chevron stock price was hit hard as travel restrictions were put into place and work/school/play went virtual. This caused a drop in demand for oil that drove crude barrel prices negative and dropped gas prices to low levels not seen since the 20th Century.

The company’s market capitalization was also cut in half, and its cost-saving measures prompted many investors to shy away, while those still holding shares licked their wounds and prayed for recovery. That bounce back is almost complete now, and the next three months should be a great bull run for the oil industry’s value.

Just don’t expect your luck to last forever. Global competition could put the brakes on this stock’s growth potential.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.