Chevron Corporation (NYSE:CVX) shares were hitting 52-week highs not long ago, but have come under pressure as a number of issues and a market pullback take their toll. Chevron shares are now well below the recent highs and trade near a key support level of about $107, which is the 200-day moving average. This could be a tempting level for some to consider buying, especially if you have a long-term investment horizon.
However, there are a few reasons to believe that the slide in Chevron will continue and even push the stock toward the 52-week lows at about $92 per share. Here are three reasons why Chevron shares could continue to decline and present an even better buying opportunity to patient investors:
1. The negative macroeconomic headlines including the European debt crisis, a slowdown in China, nuclear tensions with Iran, a looming fiscal cliff in the United States, and many others are likely to persist in the coming months. This could add to market volatility and lead to major market drops like the one we saw the day after the presidential election, in which the Dow Jones Index plunged over 300 points.
2. In addition to the macroeconomic headlines, there are company-specific headlines and issues that are also likely to keep pressure on Chevron. This includes lawsuits in Brazil, due to an oil spill, in which local officials are seeking about $22 billion. The company experienced a fire on Aug. 6, at its Richmond, Calif., refinery, which led to reduced production. Even more recently, a judge in Argentina put an embargo on up to $19 billion worth of assets that Chevron has in that country in an attempt to help enforce a judgement in that amount for a lawsuit in Ecuador. The lawsuit in Ecuador stems from environmental damages claims in the Amazon, but since Chevron has few assets in Ecuador, plaintiffs are trying to get the judgment (which Chevron believes is "illegitimate") enforced in Argentina, where it is the fourth-largest oil producer. If the embargo proceeds, it could take all the proceeds from Chevron production in Argentina and that could reduce financial results in the coming quarters.
3. Oil prices have been declining and the slide might not be over yet. The drop in oil appears to be caused by concerns about the global economy, but there is also a supply issue. Oil production in the United States is now at a 15-year high, and production is expected to increase in 2013. Not long ago, oil was trading around $100 per barrel, but it has dropped to about $85. If oil prices continue to drift lower, this will impact profit margins for oil companies. Even if prices stay at current levels, earnings estimates might need to be reduced to reflect the reality of a potentially sustained price drop. Some analysts believe that oil prices are headed for about $70 per barrel, and if that happens it is hard to see how Chevron shares can remain at current levels.
Key Data Points For Chevron:
- Current Share Price: $107.51
- 52-Week Range: $92.29 to $118.53
- Dividend: $3.60 per share, which yields 3.3%
- 2012 Earnings Estimate: $12.86 per share
- 2013 Earnings Estimate: $12.37 per share
Data is sourced from Yahoo Finance.
Disclosure: I 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.
Disclaimer: No guarantees or representations are made. Please consult a financial advisor before making investments.