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

Nilanjan Choudhury

Shares of Chevron Corporation CVX, which has successfully survived the worst oil crash in more than 50 years, now sit near 52-week lows. However, the blue-chip energy company, one of the world's largest integrated oil firms with annual revenues of more than $166 billion, is poised for capital appreciation, riding on its numerous strengths.

Chevron has been able to bolster its cash from operations, allowing it to maintain its dividend streak. The company’s balance sheet seems healthy enough and the dividend yield of around 4.2% should remain safe going forward. Apart from slowly improving oil 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 ExxonMobil XOM, Royal Dutch Shell plc RDS.A and BP plc BP.

Why Chevron Is the Best Pick?

One of the Best Production Profiles: Chevron seems one of the best-placed global integrated oil companies to achieve sustainable production ramp-up. The company's 2018 production was 2,930 thousand oil-equivalent barrels per day (MBOE/d), up 7.4% from a year ago and up 13% over the 2017 output.

Investors should also note that Chevron's total upstream production of crude oil and natural gas in the third quarter increased 2.6% compared with last year’s corresponding period to 3,033 MBOE/d – the fourth successive quarter where volumes exceeded 3 million barrels per day. Moreover, Chevron has guided to growth through 2023 that implies a 3-4% CAGR from 2018.

Permian Emphasis: Chevron’s substantial Permian holdings of 2.2 million net acres have already realized production growth of 71% in 2018 with Chevron targeting output of 900,000 barrels per day in 2023. During the third quarter, volumes from the world’s hottest shale play jumped by 38.6% to 455 MBOE/d.

Chevron’s well economics in the Permian also continues to show improvement as the company has been able to achieve a 40% reduction in its development and production costs since 2015. Thanks to its successful cost control initiatives, the company has lowered its break-even price for oil to an industry-leading $51 per barrel.

Higher Liquids Split: Chevron's high-margin, liquids-heavy portfolio (60%) makes earnings highly sensitive to oil prices. With the macro environment expected to remain mostly favorable and Chevron's lower cost structure, the company expects to increase its free cash flow in 2020 and beyond, hinting at dividend growth.

Robust Free Cash Flow: By definition, free cash flow is what remains after operating the business and investing in future growth. In the first nine months of 2019, the company generated $21.7 billion of cash from operating activities while shelling out $9.9 billion in the form of cash capital expenditures for free cash flow of $11.8 billion. Chevron’s stellar record of generating free cash flows point to its ability to take care of dividends, buybacks and debt repayment.  

A Dividend Aristocrat: One of the only two energy stocks on the list of Dividend Aristocrats, Chevron has a long and consistent dividend payout record. Importantly, the company’s dividend appears relatively safe, thanks to improvement in its cash generating potential. During the Jan-Sep period of 2019, Chevron paid out $6.7 billion as cash dividends to its shareholders, substantially lower than the free cash flow of $11.8 billion.

The strong free cash flow generation also indicates room for growth of the dividend from current levels. Per Chevron CEO Mike Wirth, the dividend is the most important thing to people who own the stock. Therefore, we expect the company to increase payout shortly - for the 33rd consecutive year.

Attractive Valuation: The stock now trades at $112.90, only a few dollars over its 52-week low of $110.42. The current Zacks Consensus Estimate for 2020 is a profit of $6.71 per share. This puts Chevron at 16.83X forward earnings. This is a large discount to its 5-year median earnings multiple of 23.35X.

Impressive Reserve Replacement Ratio: Over the past few years, oil and gas supermajors have struggled to replace reserves as new energy resources become less accessible. Given their large asset bases, achieving growth in the production of oil and natural gas has been a challenge for many years. In this context, Chevron's 2018 oil reserve replacement ratio (RRR) of 136% is indicative the company’s ability to add proved reserves to its reserve base in excess to the amount of oil and gas produced.

Fortress Balance Sheet: Chevron has a very strong balance sheet. The company's total debt is currently around $32.9 billion, down from $36.1 billion, a year-ago. Importantly, the company's debt ratio was just 17.4% as of Sep 30, 2019.

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