Oil is showing some serious signs of weakness, and it now trades just barely above the $95 per barrel level. Some traders believe that if oil breaks below $95, it will drop to the $80 range. Even the CFO of Royal Dutch Shell (RDS-A) thinks oil could trade for about $70 per barrel in 2012, and even possibly drop to $50 per barrel. With the way things are going in Europe, and when considering how fast many other commodities like gold are declining, it's easy to see why oil might still have further to fall. If central banks around the world don't initiate new stimulus programs soon, the markets could head lower and take oil down as well. If the global economy is in for a period of prolonged economic weakness, oil is almost certainly headed lower.
Lower oil prices will sharply reduce the robust profits that major oil companies like Chevron (CVX) have been making. If this scenario plays out, a much better buying opportunity is likely for Chevron shares. Another issue that could weigh on Chevron and Transocean (RIG) is the multi-billion lawsuit filed by Brazil for an oil spill that occurred last year. A recent Bloomberg/Businessweek article gives details on the case:
"Chevron and Transocean have caused a contamination bomb with a prolonged effect," Oliveira said, as he filed charges against the 17. An outspoken career prosecutor who under Brazilian law enjoys tenure in his influential civil service position, he alleged "crimes against the environment"-namely, that the defendants knew they were drilling in a high-pressure reservoir, recklessly proceeded anyway, and caused severe ecological harm. Oliveira has said that if convicted, the defendants could face prison terms as long as 20 or 30 years.
Chevron does not believe the suit has merit and it intends to defend its employees as well as the company. Regardless of which party prevails, the uncertainty and negative headlines are not good for Chevron or Transocean. However, Chevron is a top quality long-term holding and it is worth buying around $90 per share, if it gets to that level. The drop in oil and the weakness in the markets or a general correction could be the main driver to take the stock back to where it traded last October, close to $90. Chevron shares are now near a key support level, which is the 200-day moving average, at $101.89 per share. A significant break of that level would possibly take the stock down to the psychologically important level of $90 per share, and that would be an ideal level for long-term investors to start accumulating the stock.
Key Data Points For Chevron From Yahoo Finance:
Current Share Price: $102.69
52-Week Range: $86.68 to $112.28
Dividend: $3.60 which provides a yield of 3.5%
2012 Earnings Estimate: $13.38 per share
2013 Earnings Estimate: $13.55 per share
P/E Ratio: about 8 times earnings
Key Data Points For Transocean From Yahoo Finance:
Current Share Price: $45.75
52-Week Range: $38.21 to $70.77
Dividend: $3.16 per share which yields 6.8%
2012 Earnings Estimate: $2.89 per share
2013 Earnings Estimate: $5.06 per share
P/E Ratio: about 15 times earnings
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.