Just weeks ago the price of oil was trading around $100 per barrel, fueled by a QE3 rally and tensions in the Middle East. However, economic fundamentals have caught up with oil and since there is a strong supply of oil and signs of weakening global growth, the price has dropped back to about $85. Not surprisingly, many major oil stocks which recently made new 52-week highs, have also declined along with oil.
Not long ago I wrote that it was time to sell oil stocks as that sector appeared to be peaking. Now that a solid pullback has occurred, it is time to start accumulating shares on any continued weakness, particularly in Chevron (CVX) which appears poised to outperform Exxon Mobil (XOM) shares. Here is a closer look at Chevron:
Chevron Corporation shares have seen a pullback from about $118 to around $109 in just the past few trading days. That brings the shares back into the buying range, especially since a key support level of the 200-day moving average for the stock is about $107 per share. With the shares close to that level now, it makes sense for some investors to slowly start to accumulate, but I would still save the heavier purchases for a buying opportunity at the $107 area which is now in striking distance. By contrast, the 200-day moving average for Exxon Mobil is about $85 per share which along with valuation issues means it might be too early to buy that stock.
Chevron appears to be a better value when compared to some of the other major integrated oil companies. In terms of PE ratio, Chevron trades for about 8.5 times earnings, while Exxon Mobil trades for about 11.5 times earnings. When comparing the dividend, Chevron once again, looks better with a 3.2% yield versus Exxon Mobil's yield of just 2.5%. While some investors might prefer Exxon Mobil since it is the largest oil company in the world, the premium it now commands makes Chevron the undervalued oil stock that is worth buying. It's also worth noting that Exxon Mobil is the nation's largest producer of natural gas and that level of exposure means it remains subject to continuously weak prices for this commodity. Chevron has less exposure to natural gas which means it could be better positioned since profit margins on oil are significantly higher than natural gas.
Like any major oil company, Chevron is facing some challenges. It had a fire at its Richmond, California refinery on August 6, which temporarily reduced production. It also has potential liabilities stemming from an oil spill in Brazil, however, this and the refinery fire look like short-term blips for a company of this size. While it could face headline risks from these and other issues in the near-term, any dips are worth buying. Chevron has about $21.5 billion in cash and just around $10.2 billion in debt. The long-term looks bright and Chevron's strong balance sheet will allow it to pursue exploration and production opportunities.
Here are some key points for CVX:
- Current share price: $109.71
- The 52 week range is $92.29 to $118.53
- Earnings estimates for 2012: $12.87 per share
- Earnings estimates for 2013: $12.52 per share
- Annual dividend: $3.60 per share which yields 3.2%
Here are some key points for XOM:
- Current share price: $89.88
- The 52 week range is $73.90 to $93.67
- Earnings estimates for 2012: $7.78 per share
- Earnings estimates for 2013: $8.19 per share
- Annual dividend: about $2.28 per share which yields about 2.5%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.