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Big Oil Stocks: Why Chevron (CVX) Is the Best Right Now

Nilanjan Choudhury
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Shares of Chevron Corporation CVX, which has survived the worst oil crash in more than 50 years, now sit near 52-week highs. The blue-chip energy company is up more than 100% off its August 2015 lows and poised for further capital appreciation, riding on its healthy earnings growth prospects.

The supermajor’s higher liquids split should enable it to leverage the strengthening oil prices and boost upstream business (or exploration and production) earnings, more than making up for weaker profits in its smaller downstream segment, which refines crude oil into fuels like gasoline and diesel.

Chevron has been able to bolster its cash from operations, allowing it to recently raise its dividend. The company’s balance sheet seems healthy enough and the dividend yield of nearly 4% should remain safe going forward. Apart from rising commodity prices, conservative capital spending and cost control would ensure rapidly improving cash flow.

Not surprisingly, the stock is a huge draw among investors and is currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s take a look into the factors why this mega-cap company is the best bet in the industry and has more clear catalysts than the likes of Exxon Mobil Corp. XOM and Royal Dutch Shell plc RDS.A.

Why Chevron Is a Good Pick

Stellar Permian Operations: Joining the Permian rush, Chevron expects to spend $3.3 billion on the hottest U.S. shale field in 2018, up 70% year over year. The company’s substantial Permian holdings of 2.2 million net acres have already realized production growth of 35% in the past year with Chevron targeting a CAGR of 30-40% through 2020.

Higher Liquids Split: Chevron's high-margin, liquids-heavy portfolio makes earnings highly sensitive to oil prices. With the macro environment expected to remain favorable and Chevron's lower cost structure, the company expects to increase its free cash flow in 2018 and beyond, hinting at dividend growth. Moreover, Chevron’s current oil and gas development project pipeline is among the best in the industry, which is projected to add more than 120 thousand oil-equivalent barrels per day in 2018.

Dividend Aristocrat: One of the only two energy stocks on the list of Dividend Aristocrats, Chevron's long and consistent dividend payout record appears relatively safe, thanks to improvement in its cash generating potential.

Impressive Reserve Replacement Ratio: Over the past few years, the oil and gas supermajors have struggled to replace reserves, as new energy resources become more inaccessible. Given their large base, achieving growth in oil and natural gas production has anyway been a challenge for these companies over many years. In this context, Chevron's 2017 reserve replacement ratio of 155% points to its robust long-term health and ability to grow its operations.

Robust Earnings Growth Expectations: The Zacks Consensus Estimate for earnings for second-quarter 2018 for Chevron is currently pegged at $2.14, reflecting an expected year-over-year growth of 135.2%. Moreover, earnings are expected to register a staggering 114% growth in 2018.

Rising Earnings Estimates: Annual estimates for Chevron have moved north over the past two months, reflecting analysts’ confidence on the stock. Over this period, the Zacks Consensus Estimate for 2018 has increased by around 28.5% to $8.29 per share. The Zacks Consensus Estimate for 2019 has also moved up 33.3% over the same timeframe to $9.01.

Style Scores: In addition to a top Zacks Rank, the stock has a Growth Score of A and VGM Score of A.

Another Stock to Consider

Apart from Chevron, the firmness in the price of oil is also good news for independent exploration and production companies like Whiting Petroleum Corp. WLL.

Whiting Petroleum’s core operations are focused in North Dakota's Williston Basin, providing this energy finder with an enviable acreage of top-tier assets and a multi-year drilling inventory. The company’s production consists of 84% oil/natural gas liquids. In the last 60 days, 16 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 186% in the same period.

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Chevron Corporation (CVX) : Free Stock Analysis Report
 
Royal Dutch Shell PLC (RDS.A) : Free Stock Analysis Report
 
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
Whiting Petroleum Corporation (WLL) : Free Stock Analysis Report
 
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