In the context of the unpredictability of oil prices (on a current uptrend), Chevron (NYSE:CVX) has been relatively successful this year. The company's stock has performed well and Chevron, while certainly not without its challenges, has apparently done what it took to maintain their historical dividend payout, including managing the balance sheet, cutting costs and coming up with new projects, which has resulted in favorable technicals, as we will see here.
(Image Source: Offshore Energy Today)
Recent Chevron and Oil Price Developments
As shown by these charts for crude oil and Brent crude for the past month, oil prices are increasing on expectations of a production freeze or cut, coordinated between Russia and the Organization of the Petroleum Exporting Countries.
(Source for charts: Nasdaq)
According to Zacks Investment Research, Chevron share prices have responded better to the recent oil-price momentum than some of its other peers, given the company's oilier asset base. CSX stock is up more than 15% year-to-date. Chevron's current oil and gas development pipeline is among the best in the industry, boasting large, multi-year projects. The company has remained competitive by implementing aggressive cost reduction initiatives, getting out of unprofitable markets and streamlining the organization.
As oil prices have gone up, Russian President Vladimir Putin has supported efforts by OPEC and non-OPEC members' attempts to curb output. Russia pumps more crude boil than any other country, but is not an OPEC member. The 14-nation cartel in turn wants Russia to reduce its current production of 11.1 million barrels a day by between 200,000 and 300,000 barrels a day, according to the Wall Street Journal. Russia's energy minister Alexander Novak was scheduled to meet this past Wednesday with Saudi Arabia's energy minister Khalid al-Falih and others to discuss a potential cut, the Journal adds.
The oil market could rebalance in the first half of 2017 if OPEC sticks to its production cap deal, says Investors Business Daily, but oil prices could fall by nearly 20% if the cartel fails to agree, experts warned. "The market - if left to its own devices - may remain in oversupply through the first half of next year. If OPEC sticks to its new target, the market's rebalancing could come faster," the International Energy Agency said in a October 11th report.
OPEC had already reached an agreement in September to cap production at 32.5 million - 33 million barrels per day, down from the daily production of 33.2 million barrels a day at the end of August. Details on who will cut and how much will be decided at the OPEC meeting in November.
Analysts at Goldman Sachs, however, wrote in a note on October 10th: "Failure to reach such a deal would push prices sharply lower to $43 a barrel in our view as we forecast that the global oil market is in surplus in the [fourth quarter]." OPEC's output went up by 160,000 barrels a day to a record 33.64 million barrels a day last month as Iraq's production reached a new high and Libya's ports reopened.
As informal talks between top producers went on in Istanbul, oil prices jumped to a year high before falling as analysts question commitment to the deal. But on a more positive note, Goldman sees U.S. shale production as stabilizing with higher prices if the production cap could allow for a later "rapid ramp-up in production in 2017."
The International Energy Agency also stated that global oil supply increased by 600,000 barrels per day in September, with non-OPEC supply up 500,000 barrels a day on higher outputs from Russia and Kazakhstan. But the agency thinks that non-OPEC supply will fall by 900,000 barrels per day this year before rising by 400,000 barrels a day in 2017. Demand is expected to go up by 1.2 million barrels a day this year and rise roughly the same next year.
CVX Business Analysis
Almost a month ago, Canadian banker BMO Capital gave Chevron stock an outperform rating and a $120 price target. If BMO is right, then Chevron investors would gain about 20%, and collect a nice 4.2% dividend yield on top of that.
Inflection point seems to be a buzzword in the oil industry. Inflection points are: the point at which oil production hits its fastest rate, ceases to increase, and inexorably declines (peak oil); the price point at which producing oil generates profits (or losses) for producers; and the point at which an oil stock becomes cheap enough to buy. BMO said that Chevron stock is about to hit that final inflection point, and therefore urges investors to buy.
Oil companies are capital-intensive businesses, investing millions, even billions of dollars on exploration, on drilling wells, on building derricks and infrastructure to transport oil after it's extracted, all before being able to deliver gasoline to the pump. But as StreetInsider.com explains, what gets BMO really going about Chevron is that BMO thinks Chevron is approaching a point at which it can adjust its costs up and down as oil prices dictate, to maintain its dividend payments and maximize its profits.
Furthermore, development of "unconventional" (i.e., fracked) and "brownfield" (i.e., depleted, but not yet empty) oil fields are certainly less expensive for Chevron than the development of new fields. CVX intends to "increasingly prioritize" investments in such opportunities accordingly, and according to BMO, this will permit Chevron to grow its production 4% annually over the next five years at minimal cost.
BMO observes that in 2015 (according to S&P Global Market Intelligence, Chevron's least profitable year of the past decade), 50% of Chevron's capital was tied up in "pre-productive" projects. Focusing on fracking and exploitation of existing fields will permit the company to reduce pre-productive claims going forward on its capital to only 25% by 2018. And 25% of Chevron's total production will be shifted into frackable fields, where production can be ramped up when prices are good, and scaled back when prices are bad.
But overriding all this concerning Chevron's fortunes, of course, is the price of oil. BMO theorizes that it takes a $50 per-barrel oil price of about to provide the cash flow to cover Chevron's 4.2% dividend yield. Moreover, "Chevron is increasingly leveraged to a recovery in the oil price environment." So prices above $50 per barrel pay for the dividend, and also leave some profits for Chevron, while prices below $50 do not. (The accuracy of this determination by BMO remains to be seen.)
As this prior Seeking Alpha article explains, Chevron's Upstream operations (~26% of 2015 revenue) include exploring for, developing, and producing crude oil and natural gas; processing, liquefaction, transportation and regasification associated with liquefied natural gas; and transporting the crude and natural gas.
The Downstream operations (~73% of 2015 revenue) are comprised of refining crude oil into petroleum products; marketing of crude and refined products; transporting crude oil and refined products by pipeline, marine vessel, and rail car; and manufacturing and marketing of commodity petrochemicals, plastics, fuel additives, and lubricants.
The business has struggled since oil prices' dramatic collapse. Revenue in the Upstream segment was down 47% from 2013 to 2015, and the Downstream business was down nearly 43% over the same time period.
As per Chevron's 2015 year-end report, Chevron had significant net proved reserves in their Upstream business, which totaled an estimated 6.26 billion barrels of oil and 29.4 billion cubic feet of natural gas. These reserves are concentrated geographically, with 21% located in Kazakhstan and 19% located in the United States.
During 2015, Chevron continued to expand production with oil-equivalent production of 2.62 million barrels per day, which was up 2% year-over-year from 2014 levels. For 2016, the company estimates that worldwide production will be up 4% compared to 2015.
Without a doubt, the largest driver of revenue and profits for the business is the price of oil. According to the Energy Information Agency's Annual Energy Outlook 2016 report, the price for West Texas Intermediate is expected to increase 4% per year from 2015-2040 while Brent crude is expected to increase at 3.9% over the same timeframe.
(Image Source: Bidness Etc)
The Chevron Dividend History
Chevron Corporation looks enticing when glancing at the historical dividend statistics. The stock currently yields around 4.3% and has provided highly reliable dividend growth over the years. Chevron's dividend has increased by 7.8% per year over the last 20 years and by 8.5% annually over the last five years.
The company is also a Dividend Aristocrat, having raised its dividend for over 28 straight years.
The Dividend Aristocrats list contains companies in the S&P 500 Index that have increased dividends every year for the last 25 straight years. Dividend Aristocrats are large cap, blue chip companies from many different industries, but they have all demonstrated a healthy balance between capital growth and dividend income.
As seen below, the S&P Dividend Aristocrats Index has nicely outpaced the S&P 500 over the past decade. According to S&P, Dividend Aristocrats generated an annualized return of 10.2% over the past 10 years, easily topping the market's 7.2% rate. Over this period, dividends accounted for 31% of the market's total return, highlighting their importance in determining total shareholder return.
(Source: Simply Safe Dividends)
Technical Analysis as of October 12, Mid-Day
For the day: -0.90%, for the week: 1.75%, for the month: 3.63%, Yearly: 16.11%, year to date: 14.54%.
The long-term trend of Chevron is up, indicating that CVX has experienced an up trend for at least the past 180 trading days. The short-term trend of Chevron is up - CVX has been undergoing a short-term up trend over the past 7-10 days.
The current signal for Chevron is buy, according to Market Trend Signal, indicating that the stock could be advancing in its trend. The current rank for Chevron is 78 - this means that CVX is outperforming 78% of its peers.
According to Swing Trade Bot, Chevron stock has a rating of A. Long-term, mid-term and short-term trends are all up. 50 DMA, 200 DMA, and Relative Strength indicators are also looking bullish.
(click to enlarge)
Bullish Swing Setup - Rules (via "Hit & Run Trading"):
Slingshot Bullish on October 11, 2016
Yesterday, stock makes a 2-month high. Today's low is at least 10 cents lower than yesterday's low. For the buy: either today or tomorrow when the stock trades 10 cents above yesterday's high. Initial stop: 2 points under entry price.
According also to Chartmill, both the short-term and long-term trends are positive. CVX is currently trading in the upper part of its 52-week range. The S&P 500 Index is also trading in the upper part of its 52-week range, so CVX is performing more or less inline with the market.
CVX has an average volume of 6,214,450. This is a good sign as it is always nice to have a liquid stock. When compared to the yearly performance of all other stocks, CVX outperforms 62% of them, which is more or less inline with the market. CVX is part of the Oil & Gas industry. There are 104 other stocks in this industry, CVX did better than 58% of them.
SMA(20), SMA(50), SMA(100), SMA(200) are all positive technical indicators of an uptrend for CVX.
2 important support areas can be observed:
A support zone ranging from 97.70 to 101.59. This zone is formed by a combination of multiple trend lines and important moving averages in multiple time frames.
Support @94.87 from a trend line in the weekly time frame.
When analyzing the resistance, Chartmill notices 2 important areas:
A resistance zone ranging from 102.38 to 103.85. This zone is formed by a combination of multiple trend lines and important moving averages in multiple time frames.
A resistance zone ranging from 106.02 to 107.03. This zone is formed by a combination of multiple trend lines in multiple time frames.
Trade Setup Analysis
CVX has an excellent technical rating and also presents a decent setup pattern. Prices have been consolidating lately. There is a support zone below the current price at 102.38, a stop order could be placed below this zone.
Possible Trading Setup
Given the decent technical rating and the setup score, Chartmill suggests the following trade:
Entry: 103.86, Exit: 98.74, Distance(%): 5.12 (4.93%), Capital: 20.29%.
An entry @103.86. This is a Buy Stop order right above the resistance zone. An exit @98.74. This is a Stop Loss order right below the 10-day low. The worst case loss on the trade is limited to 5.12 points, which is 4.93%. When investing 20.29% of your capital in this trade, your total portfolio risk will be 1.00%.
The generated setup is based on the nearest support and resistance areas. If you are looking for a more long-term trade, probably a wider stop is advisable.
Over the next 13 weeks, Chevron has on average historically risen by 2.2% based on the past 32 years of stock performance.
Chevron has risen higher by an average 2.2% in 17 of those 32 years over the subsequent 13-week period, corresponding to a historical probability of 53%.
The holding period that leads to the greatest annualized return for Chevron, based on historical prices, is 1 week. Should Chevron stock move in the future similarly to its average historical movement over this duration, an annualized return of 48% could result.
How has Chevron managed its balance sheet? The current quarterly EPS growth is 223.08%. Chevron's challenges (feeble growth in the company's earnings per share, deteriorating net income, poor profit margin, and its credit downgrade earlier this year) are countered by continuing strengths, including its solid stock price performance and largely solid financial position with reasonable debt levels by most measures.
Chevron also has these favorable financial metrics:
Inventory to sales: CVX has control over its inventory. It can be a warning sign if a company's inventory relative to sales increases significantly when compared to the previous year. Inventory to sales for CVX was 3.25% last year, while for this year it is 4.89%. Although the inventory to sales is rising, it is minimal and far below an undesirable rate of above 30%.
Account receivables to sales: Chevron's accounts receivable are not significantly out of line with sales. It's a warning sign if a company's accounts receivable relative to sales increases significantly (beyond 30%). Accounts receivable to sales for CVX was 8.17% last year, while for this year it is 9.76%.
Average shares outstanding: CVX has not been significantly increasing the number of shares outstanding within recent years, which is a good sign. CVX currently has 1,872.0 million shares outstanding. This can be interpreted to mean that the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.
Dividend yield: 4.15%, with basic materials average at 2.62%; annualized payout: $4.28, paid quarterly; payout ratio: 356.7% on an EPS of $1.20; dividend growth: 30 years since 1986.
RidgeWorth Capital Management LLC increased its position in shares of Chevron by 8.1% during the second quarter, according to its most recent Form 13F filing with the SEC. The fund owned 1,296,198 shares of the company's stock after buying an additional 96,772 shares during the period. Chevron makesup about 1.2% of RidgeWorth Capital Management LLC's investment portfolio, making the stock its 10th largest position. RidgeWorth Capital Management LLC owned 0.07% of Chevron worth $134,999,000 at the end of the most recent quarter.
Several other hedge funds and other institutional investors have also recently added to their stakes in CVX. State Street Corp boosted its position in Chevron by 1.2% in the first quarter. State Street Corp now owns 110,199,640 shares of the company's stock worth $10,513,045,000 after buying an additional 1,318,854 shares during the last quarter.
BlackRock Institutional Trust Company N.A. boosted its position in Chevron by 2.0% in the first quarter. BlackRock Institutional Trust Company N.A. now owns 49,644,363 shares of the company's stock worth $4,736,072,000 after buying an additional 987,259 shares during the last quarter. BlackRock Fund Advisors also increased its position in Chevron by 1.0% in the first quarter. BlackRock Fund Advisors now owns 30,669,148 shares of the company's stock worth $2,925,837,000 after buying an additional 306,414 shares during the last quarter. Geode Capital Management LLC boosted its position in Chevron by 2.2% in the first quarter.
Geode Capital Management LLC currently owns 15,718,173 shares of the company's stock worth $1,496,560,000 after buying an additional 334,885 shares during the last quarter. Finally, BlackRock Group LTD boosted its position in Chevron by 1.9% in the first quarter. BlackRock Group LTD now owns 15,615,464 shares of the company's stock worth $1,489,715,000 after buying an additional 296,294 shares during the last quarter. Institutional investors own 62.24% of the company's stock.
Analysts' Recent Views
A number of research analysts have issued reports on CVX shares. Barclays PLC reiterated an "equal weight" rating and set a $125.00 price objective on shares of Chevron in a research note, Zacks Investment Research upgraded Chevron from a "hold" rating to a "strong-buy" rating and set a $118.00 price objective for the company in a research note on Monday, October 3rd. Jefferies Group reiterated a "buy" rating on shares of Chevron in a research note on Friday, August 5th. Finally, Simmons upgraded Chevron from a "neutral" rating to an "overweight" rating and lifted their price objective for the company from $110.00 to $117.00 in a research note on Tuesday, August 9th. Thirteen investment analysts have rated the stock with a hold rating and twenty have assigned a buy rating to the stock. The stock currently has an average rating of "Buy" and a consensus price target of $105.09.
Conclusion: For now, based on the trend charts (long-term, mid-term and short-term) and certain technical indicators (50 DMA, 200 DMA, Relative Strength, SMA(20), SMA(50), SMA(100), SMA(200), and seasonality data), Chevron still seems to be a solid medium- to long-term dividend play, with possible prospects for growth. Chevron's track record as a blue chip dividend aristocrat and some of its fundamentals (quarterly EPS growth, inventory to sales, account receivables to sales, average shares outstanding, and dividend data) also support this view.
But with volatile oil prices sensitive to OPEC's negotiations within itself and with Russia and the uncertainty of those involved adhering to their agreements as to barrel production with its impact on supply and demand, along with CVX's current weaknesses (feeble growth in the company's earnings per share, deteriorating net income, poor profit margin, and its recent credit downgrade), the company is perhaps not be counted on for short-term trading profits.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.