Chevron: Is It A Good Dividend Stock?

Summary

• Many analysts forecast a surge in the price of crude.
• Chevron's break-even figure to fund the dividend is $55 per barrel.
• There are many positives in a prospective investment in CVX, and I provide evidence that crude price forecasts will likely miss the mark.

Stand aside, Exxon Mobil (XOM). Chevron Corporation (NYSE:CVX) now holds the title of the company with the lowest debt to equity ratio (.26) in its peer group. XOM in contrast has a ratio of .39X.

Chevron stole the crown despite a recent acquisition spree that resulted in an all stock transaction for Noble energy, followed by a proposed deal to gobble up what is left of Noble Midstream Partners (NBLX).

Many pundits believe the company will be well served by these acquisitions as they anticipate crude demand will rebound sharply once the COVID crisis passes. However, "a sharp rebound" is in the eye (or math) of the beholder.

Less than a month ago, the US Energy Information Administration (EIA) forecast average prices for Brent in 2021 at $56 a barrel through Q1, falling to $52 a barrel later in the year. The EIA projects average prices for WTI this year at $50.21 with 2022 bringing an average price of $51.56.

As we will see, there are many that disagree with the EIA predictions.

What we cannot dispute is that Chevron's revenue fell by over 30% YoY in the last quarter, and the company lost $5.5 billion for the full fiscal year.

Pundits Predict A Strong 2021 For Chevron Stock

Minor factors in the optimism voiced by many analysts are the synergies created by Chevron's acquisition of Noble Energy and the expected consummation of its deal with Noble Midstreams Partners.

Management anticipates $300 million in cost savings from Noble Energy as well as access to prime properties in the DJ and Permian Basins. The acquisition is expected to be accretive to free cash flow within a year after the deal closes.

Acquiring Noble Energy resulted in CVX owning a 62.5% interest in Noble Midstream. Buying the remainder of that company should reduce costs for Chevron and allow the full integration of the business into its operations.

Pundits also view management's decision to reduce the long term capex budget by around 25%, from a former range of $19 to $22 billion to a current target of $14 to $16 billion, as a strong positive. The thinking is that the revised capex will allow the company to maintain production while providing it with the flexibility to service its dividend and engage in share repurchase programs.

This is likely realistic considering the firm's production rose 1% to 3.08 million barrels per day in 2020 following previous capex cuts.

In Q4, for the second consecutive quarter, Chevron's break even price per barrel for Brent was $50. With the revised capex budget, management states the breakeven price per barrel to fund the dividend is $55 per barrel. Consequently, the EIA price projections I previously quoted are a prime reason many investors see the stock as one to be added to their portfolio.

However, there have been a number of analysts that see the EIA forecasts as quite conservatize.

RBC Capital Markets analysts opine that the production decline resulting from President Biden's policies will lead to a $5 increase in global oil prices. RBC views CVX and XOM as the greatest beneficiaries of that change.

JP Morgan's team thinks crude will hit $60 a barrel in the near term. According to analyst Christyan Malek, $80 a barrel oil is possible if OPEC fails to increase production.

Mizuho's Daniel Boyd believes drillers' coronavirus driven production cuts overshot the runway. He predicts that an upcoming shortage, coupled with a renewal in air travel, will drive crude prices higher than most anticipate. Like RBC, Mizuho's analysis predicts CVX will be one of the big winners in that scenario.

We expect pent-up demand for air travel to drive a 'V' shaped recovery in demand. Jet fuel is only 8% of demand but represents 40-50% of the decline.

Daniel Boyd analyst

Boyd may be onto something. According to a report issued by Baker Hughes (BKR), 2020 ended with the lowest number of rigs drilling in the US since 2005. While rig counts are rising, US explorers slashed spending by nearly 50% last year, and a report by Evercore ISI predicts no more than a 5% increase by crude producers in 2021.

Bank of America (BAC) sees the potential for spikes in crude rising into the triple digits while late last month Goldman Sachs (GS) forecast $70 a barrel in Q2 and $75 in the third quarter.

Source: BNN Bloomberg

All of this is encouraging; however, I have a differing perspective.

I've Seen This Movie Before

Analysts are largely focused on the impact on the oil industry caused by the pandemic. Unfortunately, the malaise in the oil patch has been ongoing for over half a decade. CVX is undoubtedly a premier company in the industry. Yet if we peruse the firm's history, we see that persistent problems emerged with Chevron well before the COVID crisis dawned.

The chart below provides a view of the Chevron's net income over the last ten years.

Source Data Seeking Alpha/ Chart by Author

Of course there is good reason for the poor performance of a company as outstanding as CVX. The following graph gives a record of the inflation adjusted price of crude during the same time frame.

Source: Chart by Author (Price is for Illinois Sweet Crude)

The highest average annual price over the last six years has not reached the lowest level of the previous ten years.

A bull's response would be to point to the recent production and capex trends as well as the analyst's projections. In looking back over my articles of yesteryears, I came across the musings of other oil mavens. Following are a few samples.

In November of 2014, the insider purchases of oil executives more than doubled that of the previous ten months.

Around that same time, Daniel Dicker, a man with 25 years of experience trading crude on the New York Mercantile Exchange and the president of MercBloc Wealth Management Solutions, had this to say about the drop in oil prices.

Everybody is trying to put a very happy spin on their ability to weather $80 oil, but a lot of that is just smoke. The shale revolution doesn't work at $80, period.

Sources from Bloomberg reinforced Dicker's opinion by claiming that 19 shale regions in the US were unprofitable with crude selling at $75 a barrel or less.

Of course, shale oil not only weathered sub $80 crude, it served to drive crude prices lower.

A few weeks after Dicker uttered those words, legendary oilman T Boone Pickens stated crude would return to $80 to $90 a barrel in 12 to 18 months. He also revealed he had recently invested in twelve oil companies.

That followed a 2008 proclamation by Mr Pickens wherein he predicted a $200 a barrel oil price by 2011.

All of this can be dismissed as the nattering of a crew of talking heads. Perhaps investors should turn to government agencies to gain an accurate perspective for crude prices.

Source: EIA

(Note: The EIA forecast for 2019 was " near or higher than $50". The EIA figure is for WTI. The price for average cost is for Illinois Sweet Crude which is normally approximately $2 below WTI; however, unlike the average costs data, the EIA figures are not adjusted for inflation.)

As you can see, the figures provided by the EIA are also well off the mark. On average, EIA estimates overshot the actual price by over 18% from 2015 through 2018.

Less than three months ago, the American Petroleum Institute reported that US crude supplies increased by 1.97 million barrels for the week ended December 11th. The EIA forecast had been for a drop in inventories of 1.9 million barrels.

My point is that if a large number of executives of oil exploration companies, an analyst that spent a quarter century trading crude on the New York Mercantile Exchange, a billionaire that made his fortune in the oil industry, and the government agency responsible for predicting the price of crude oil, consistently fails to predict crude oil prices, then why should I have confidence in Chevron's prospects?

The following chart is another reason to proceed with caution when considering an investment in CVX. The data provided are analysts' 2 year consensus estimates for a variety of growth metrics for Chevron.

Source: Chart by Author

A Bit More To Consider

For bulls, there is an additional possible positive regarding an investment in CVX: there is some evidence that crude prices increase as the value of dollar deteriorates.

However, as the charts below illustrate, the correlation is not perfect. After all, there are many factors that drive crude oil prices.

Source: Both above charts forexkarma.com

Nonetheless, for those who believe the dollar is headed to an inflationary cycle, an investment in Chevron may make sense.

Bears need look no further than Iran and Venezuela.

Combined, those two nations were producing 5.8 million barrels of oil daily when the previous administration took office. The sanctions that followed caused their crude exports to fall by 60%. Should those countries' production return to 2016 levels, an additional 3.5 million barrels of crude will be entering the market.

Is Chevron's Dividend Safe?

With its strong financial foundation, the company's dividend, sporting a 5% plus yield, is likely safe for the foreseeable future. As previously stated, management cites $55 a barrel crude as the level at which the company can cover the dividend.

However, prospective investors should understand that over the past decade, Chevron has only covered the dividend payments through free cash flow roughly half of the time. The current payout ratio is nearly 134%, and the five year dividend growth rate is 3.81%.

Is Chevron A Good Stock To Buy?

There are a plethora of reasons to consider CVX as a reasonable investment.

The management team can rightfully be described as exemplary. As an integrated energy company, CVX is less vulnerable to swings in the crude price. The company's ability to break even at $50 per barrel and to pay a dividend at $55 per barrel bodes well for investors. Chevron's low leverage levels, coupled with management's decision to pare back capex, are also positives.

My problems with adding to an investment in the company can be conveyed by perusing the charts provided in this article.

Years before the pandemic struck, there was a transformation in the industry. Over the last six years, the premier names in oil have struggled. Perhaps of greatest importance is the inability of the industry's best minds to predict the price and/or production levels of the global oil industry with any degree of accuracy.

I maintain that an investment in Chevron hinges on the ability to predict crude prices. Since I cannot find a means to achieve that task, I must rate CVX as a HOLD, despite its many strengths.

Chevron Stock Price

As I type these words, CVX shares trade for $106.71. The average 12 month price target of 26 analysts covering the stock is $104.72.

Only two analysts provided a price target following the last quarterly report. One has a target of $115, the other of $105.

I believe the shares currently trade near fair value. Despite the negatives presented in this article, I considered the valuation attractive early this year. Even with my concerns, there is a price at which an investment in CVX has a reasonable risk/reward profile.

Analyst’s Disclosure: I am/we are long CVX. 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.

I have no formal training in investing. All articles are my personal perspective on a given prospective investment and should not be considered as investment advice. Due diligence should be exercised and readers should engage in additional research and analysis before making their own investment decision. All relevant risks are not covered in this article. Although I endeavor to provide accurate data, there is a possibility that I inadvertently relay inaccurate or outdated information. Readers should consider their own unique investment profile and consider seeking advice from an investment professional before making an investment decision.