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Is Chevron a Buy?

Matthew DiLallo, The Motley Fool

Chevron (NYSE: CVX) has had an up-and-down year. Shares of the oil giant tumbled to start 2018 after it posted disappointing results to end last year. While its stock would go on to rebound as oil prices improved through the middle of the year, it has come crashing back down along with crude in recent weeks. As a result, shares of Chevron are down about 11% for the year.

That sell-off might have some investors wondering if the oil giant's stock is worth buying. Here's a look at the bull and bear case.

An offshore drilling rig at sunset.

Image source: Getty Images.

The bull case for Chevron

Chevron controls a diversified portfolio of energy assets. It's the largest oil producer in the U.S. and operates some of the lowest-cost oil assets, not only in its home country but around the world. In addition, the company has a meaningful downstream and chemicals business that acts as a natural hedge for its upstream assets since these facilities consume oil and gas, turning them into higher valued products. That diverse portfolio enables Chevron to generate boatloads of cash.

Through the third quarter of 2018, Chevron hauled in $21.5 billion in cash, which was enough to pay out $6.3 billion in dividends and invest $14.3 billion in expansion projects with room to spare. The company used the excess to buy back stock, pay down debt, and bolster its cash position, which is up to nearly $10 billion. That cash-rich balance sheet -- when combined with the company's low leverage ratio -- has enabled Chevron to maintain the second highest credit rating in the oil patch.

Thanks to its diversified and low-cost operations, Chevron can generate enough cash at $50 oil to pay its current dividend -- which yields 4% -- and fund its capital spending plan. Because of that, and its strong balance sheet, the company is well suited to weather lower oil prices. As things stand, the company's investment plan has it on track to grow its production at a 4% to 7% compound annual rate through 2020. That steady growth should give Chevron the fuel to continue increasing its dividend, as it has for the past 31 years.

Barrels of oil rising in height with an upward pointing red arrow in the background.

Image source: Getty Images.

The bear case for Chevron

As an oil company, Chevron is highly sensitive to changes in oil prices. When crude crashed a few years ago, it wasn't generating enough cash to cover both its dividend and capital program, which forced the company to sell assets and borrow money to bridge the gap. That could happen again if oil prices continue falling.

Another concern with Chevron is that it's not growing as fast as some of its peers. Hess (NYSE: HES), for example, expects to increase its production at a 10% compound annual growth rate all the way through 2025. While Hess is starting from a much smaller base, it could potentially create more value for its investors over that time frame. Big-oil peer ExxonMobil (NYSE: XOM), meanwhile, has an ambitious plan to grow its production 25% by 2025, which should double its earnings and cash flow from 2017's level without any improvement in oil prices. Exxon's strategy is to prioritize investing its cash flow to grow its profitability while Chevron's main goal is to increase its dividend. Because of that, Exxon could generate stronger returns than its peer, especially if oil prices rebound in the coming years.

Verdict: Chevron is a buy

While Chevron might not be the fastest growing oil stock, nor have the most ambitious expansion plan, it does expect to continue increasing production at a healthy rate for years to come. That should give the company the resources to keep raising a high-yielding dividend, which has historically provided companies with the fuel to outperform the market. Add in a top-notch financial profile to its low-cost oil business, and Chevron is a solid lower-risk oil stock to consider buying for the long term, especially now that it's cheaper following this year's sell-off.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.