Oil stocks are likely to be a great place to invest for the long-term for a number of reasons. First of all, central banks from around the world are printing money and this often (eventually) creates inflation. This also causes investors to seek investments in oil and gold since these assets cannot be printed like paper money. Additionally, oil consumption is likely to increase in the future as consumers from emerging market countries like India, China, Brazil and others spend more on energy and buy more cars. However, in the short-term, oil could be poised to go lower and that might create a better buying opportunity in many oil stocks. The main reason for a potential drop in the price of oil in 2013, is because the economy remains weak and it could get worse due to the Fiscal Cliff. Another big reason oil could drop is because inventories are already ample and production is projected to climb in the United States in 2013. A recent CNBC article sums up the oil supply outlook for 2013 and it states:
Andrew Lebow, senior vice president of energy derivatives at Jefferies Bache, tells The Daily Ticker that he's "bearish" on oil prices because supplies will exceed demand in the U.S. and globally next year. He lowered his estimated trading range to $75 to $100 per barrel from roughly $77 to $110 this year.
"Next year's demand [in the U.S.] will probably grow 0.8 million barrels per day after an 0.8 million barrels per day growth in 2012," he notes. "That's really sluggish growth. Supplies for in 2013 are going to be much higher than what the demand is projected to be."
Ample oil supplies now combined with a potentially weakening economy and higher production in 2013, could make lower oil prices all but a certainty and that could provide better buying in Chevron.
Chevron Corporation (CVX) shares have a lot to offer, even now; however, in a significant oil pullback, this stock is likely to provide an even better buying opportunity at lower prices. With Chevron trading at about 8 times earnings now and with a yield of just over 3%, any major corrections are worth buying. Chevron shares dropped to about $101 in mid-November and another opportunity like that could come again soon. Chevron is also facing some near-term challenges which could put additional pressure on the stock. For example, it has potential liabilities and legal expenses due to an oil spill in Brazil. It also has legal claims in Ecuador which has the potential to impact assets and oil production in Argentina, however, Chevron is fighting these claims. Even so, negative headlines from these issues could continue to surface and put pressure on the stock. Chevron has a very solid balance sheet with about $21.5 billion in cash and just around $10.2 billion in debt. Chevron's highly profitable business model and strong balance sheet should allow it to work through any short-term legal challenges and the long-term looks bright as oil prices and consumption are likely to create growth in both profits and the dividend. This makes Chevron shares worth buying when oil prices come down in 2013.
Here are some key points for CVX:
Current share price: $108.63
The 52 week range is $95.73 to $118.53
Earnings estimates for 2012: $12.55 per share
Earnings estimates for 2013: $12.18 per share
Annual dividend: $3.60 per share which yields 3.3%
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.