Chevron Corporation (CVX) shares were trending higher earlier this year, but a number of setbacks have taken a toll on the stock. While some of the recent concerns are likely to linger, the decline in the share price looks like a solid buying opportunity for investors who have a longer-term horizon. Here is a closer look at some of the challenges and the future upside potential:
1. There are macro-economic and political headwinds that have put pressure on stock prices and the price of oil. Everything from an ongoing debt crisis in Europe and fiscal cliff concerns in the United States could continue to weigh on Chevron shares and oil. Concerns in Europe remain but it appears that a full-blown financial crisis is becoming less likely. The United States may not find a solution for a fiscal cliff deal by the end of the year, however, leaders might agree to extend and therefore postpone the negotiations until next year. This could calm nerves for at least a while.
2. Chevron has some company-specific issues that have surfaced. It is being sued by officials in Brazil due to an oil spill. By some accounts, prosecutors are seeking about $22 billion in this matter. It has other problems in South America. A judge in Argentina put an embargo on up to $19 billion worth of Chevron assets in an effort to enforce a Ecuadorian judgment for environmental damages in the Amazon. Chevron believes the this case is not legitimate, but plaintiffs seem to be making headway anyhow. These issues could drag on but Chevron has options and the ability to continue to with the legal process, including filing appeals when necessary.
3. Oil prices might not have significant upside in the near-term due to a weak global economy and plenty of supply in the United States. In fact, production in the United States is now at a 15 year high, and it is expected to increase in 2013. If the U.S. economy experiences another recession, or if Europe's economy gets worse, oil prices could head back to the $60 to $70 per barrel range. That would impact profit margins for companies like Chevron.
While these challenges are not insignificant, there is a strong chance that the global economy and Chevron can muddle through them. Eventually, the global economy will see stronger growth and consumers in emerging market countries are likely to increase their use of energy. Chevron shares are very reasonably priced as the stock trades for just about 8 times earnings. This company is poised to see profits grow in the future because of investments it is making now which will allow for production to grow by around 20% by 2017. A few weeks ago, analysts at Howard Weil upgraded the stock to market outperform and set a $135 price target. That is upside of about 25% from current levels and investors are paid a solid yield of over 3% while waiting for a higher share price.
Key Data Points For Chevron From Yahoo Finance:
- Current Share Price: $104.66
- 52-Week Range: $95.73 to $118.53
- Dividend: $3.60 per share which yields 3.4%
- 2012 Earnings Estimate: $12.64 per share
- 2013 Earnings Estimate: $12.22 per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I am long CVX.