Investors have long relied on energy stocks to provide relatively stable earnings and frequent dividend payouts. However, since profitability in the sector is often tied to the price of crude oil, energy stocks have been on a wild ride this year. You probably remember when the price of crude oil futures contracts dropped into negative territory on April 20th. This extreme volatility has not been good for oil and gas companies, but the downside has presented some intriguing buying opportunities if you know where to look.
The truth is that many energy companies are struggling mightily this year, but that doesn’t mean you should overlook them entirely. Buying the best major oil companies could actually pay off in a big way for long-term investors. Chevron (NYSE:CVX) is a stock that might look attractive to value investors if they are willing to stomach some near-term volatility. Let’s take a deeper look at Chevron stock below.
Big Q2 Losses
Chevron actually surprised many analysts back in Q1 when it was one of the only major oil and gas companies to report a profit. However, things took a turn for the worse in Q2 for Chevron as the company reported a staggering $8.3 billion net loss. The loss was largely driven by falling oil prices and low consumer demand for fuel along with a $2.6 billion hit when the company impaired its Venezuelan assets. Even with the terrible earnings results, the stock price seems to have stabilized and has some upside as the negative impacts of the pandemic on the company’s earnings start to diminish.
There are a few reasons to be optimistic about Chevron even though it had a huge Q2 loss. First, Chevron’s loss was not nearly as bad as competitors like BP and Shell, who reported Q2 net losses of $16.9 billion and $18.1 billion, respectively. The company also announced it is making a major acquisition and buying Noble Energy (NYSE:NBL) for $13 billion, a sign of strength during a very uncertain and volatile period of time. There’s also the chance that oil prices have reached their bottom and that the demand for fuel will be increasing in the near future as the world gets the pandemic under control.
Chevron is a Dividend Aristocrat
A dividend aristocrat is a company in the S&P 500 that has raised its base dividend every year for at least 25 consecutive years. When you buy members of the dividend aristocrat club, you know you are getting reliable dividend growth, which is another reason why Chevron could be a strong pick for investors. The stock currently has a very attractive dividend yield of 5.76% and has increased its dividend payouts for 33 consecutive years.
If you are worried about Chevron potentially having to cut its dividend due to low oil prices, its good to know that the company is doing almost everything in its power to avoid doing so. Chevron is financing the Noble Energy deal with an all-stock transaction, which helps to keep cash on its books. It also slashed its capital investment program for 2020 by 20% to preserve cash. The company’s balance sheet strength combined with the fact that it has suspended its buyback program should also reassure investors that are worried about a potential dividend cut for the company.
Chevron Stock - What Are the Risks?
We’ve laid out some good reasons why Chevron is one of the best oil and gas companies to consider buying, but there are several risks that should not be ignored. First, there is still the possibility that oil and gas prices experience another significant decline. Should this occur, the company’s earnings would take another massive hit and expose long-term investors to some downside. It’s also worth noting that the company is currently investing in areas of the world that present unique political challenges.
Perhaps the biggest risk for long-term shareholders of Chevron is the long-term adoption of electric vehicles. As electric vehicles continue increasing in popularity, the world’s reliance on gas will decline along with Chevron’s profits. You also have to consider the fact that many people are in favor of eco-friendly transportation and will get back to using ride-sharing services which can also reduce the demand for oil.
Is Chevron Stock a Buy?
The energy sector has had a historically bad year so far and has significantly underperformed major indices like the S&P 500. With that said, Chevron is an industry-leading company with an attractive dividend, a strong balance sheet, and an intriguing valuation at this time. It’s a stock that definitely comes with its fair share of risks, but if you envision oil prices rebounding sooner rather than later it is undeniably one of the better buys in the oil and gas industry.
Companies Mentioned in This Article
Compare These Stocks
Add These Stocks to My Watchlist
7 Energy Stocks to Buy On This Historical Dip
It may seem hard to believe, but the current chaos in the energy sector, and oil stocks, in particular, will pass. The novel coronavirus that has birthed a global pandemic is being compared to the Spanish Flu of 1918.
Of course, when you have once in a century event, it’s difficult to look back in history and make an apples-to-apples comparison to our current situation. This isn’t to minimize our current situation. It’s simply to say that the market is forward-looking, but it’s also emotional. And it also hates uncertainty.
In a typical economic downturn, demand decreases, and investors are advised to “buy the dip.” But in the current environment, demand has been destroyed. Millions of Americans are being asked, and in some cases ordered, to stay home. And this simply means that oil demand is down. And investors are looking at prices that are, in some cases, at all-time lows.
The trading app Robinhood is frequented by millennial investors. And according to the latest information, many investors are trying to buy the dip on old guard oil stocks. That may be a mistake.
But the energy sector is about more than just oil stocks. There are several companies that are holding their own in the current environment. And that means when the economy opens up, these companies will be well-positioned for further growth.
Currently, the volatility and uncertainty surrounding energy stocks make them a poor choice for growth investors. However, many of these companies in this presentation offer a secure dividend that, along with the potential for capital appreciation, can make them a solid play for income investors.
View the "7 Energy Stocks to Buy On This Historical Dip".