Chevron: Expect An Uphill Struggle From Here

Summary

  • CVX's momentum has stalled after its Q2 earnings release, as the market turned its focus back to growth fears.
  • Our analysis suggests that Chevron's underlying growth cadence could decelerate, putting further pressure on CVX's upward momentum.
  • WTI crude and natural gas futures have also been struggling for buying momentum, despite the energy crisis in Europe, coupled with the current supply/demand imbalance.
  • As a result, we believe CVX's outperformance potential could be impacted by the market's indecisiveness, coupled with more challenging comps.
  • Accordingly, we reiterate our Sell rating.
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Chevron Profit Quadruples In First Quarter Of 2022

Justin Sullivan

Thesis

Chevron Corporation's (NYSE:CVX) stock recovered remarkably from its July lows as it headed into its Q2 earnings release. However, its buying momentum has since stalled, despite posting a performance that easily beat the Street's consensus.

Furthermore, we noted that the CVX appears to have formed another ominous bull trap (indicating that the market denied further buying upside decisively) this week, in line with the weakness seen in WTI crude oil futures (CL1:COM).

Chevron remains committed to its debt reduction plan, dividend payout, and stock repurchase guidance, which should spur investor confidence. However, given its outperformance from 2021, we urge investors to be wary about expecting continued outperformance as its comps become more challenging.

Therefore, given decelerating underlying growth metrics, we postulate that CVX could find it very challenging to breach its June highs as WTI crude continues to struggle for buying momentum. In addition, while the recent outperformance from natural gas has been instrumental, we believe Henry Hub natural gas futures (NG1:COM) are configured for a steeper decline after the current distribution phase. Therefore, the dynamics in the underlying market could add to the comp headwinds facing Chevron, putting further pressure on sustaining its bullish bias.

Accordingly, we reiterate our Sell rating in CVX and urge investors to leverage July's rally to cut exposure and rotate.

Chevron's Growth Rates Are Unsustainable

Chevron revenue by segment change %

Chevron revenue by segment change % (S&P Cap IQ)

Chevron posted another solid quarter in Q2, as downstream revenue (76% revenue share) surged 86% YoY, up from Q1's 75% uptick. However, its growth has clearly slowed from the peak metrics in early 2021. Furthermore, the growth in its critical upstream segment has also slowed discernibly, as it posted revenue growth of 66% in Q2, up from Q1's 52%. Notwithstanding, it was also down markedly from the highs in FY21, as Chevron faced tougher comps. Given the recent struggles in the underlying market, we postulate that the company could continue to face challenges to maintain its growth cadence.

Chevron revenue change % and adjusted EBIT margins % consensus estimates

Chevron revenue change % and adjusted EBIT margins % consensus estimates (S&P Cap IQ)

Even the bullish consensus estimates indicate that Chevron's revenue growth should moderate through FY23. Therefore, it's also likely to impact its operating leverage, as Chevron's adjusted EBIT margins are also expected to fall. As a result, we believe it's increasingly difficult for CVX to maintain its buying upside if the underlying metrics face pressure.

Notwithstanding, we believe it's unlikely for Chevron's underlying model to revert to pre-COVID days in the near- to medium-term, given the current supply/demand dynamics. Therefore, it should help undergird its profitability profile, supporting its valuation. However, we urge investors to consider the potential for further upside surprises that could lift CVX's momentum further.

WTI crude's momentum has continued to struggle despite recent hawkish comments by Saudi Arabia, which led to an initial rally. However, August gains have already been digested, as the market returned to its focus on growth fears that could further weaken retail and industrial demand.

In addition, the recent surge in natural gas futures has continued to stall, despite Russia's threat of a more extensive delivery cut against Europe. Even though the energy crisis has been worsening in Europe, amid a storage build-up to cope with the upcoming winter, it couldn't push natural gas futures past their June/July highs decisively. Therefore, we believe the market has warned investors that it's not convinced that further upside in the underlying markets is warranted. As a result, we believe that investors need to temper their expectations for leading players like CVX to outperform from here.

Is CVX Stock A Buy, Sell, Or Hold?

CVX price chart (weekly)

CVX price chart (weekly) (TradingView)

We noted that CVX's upward momentum post-Q2 earnings stalled decisively in August. Furthermore, CVX appears to be undergoing a distribution phase, as it set up a lower high in August, below June's double top. Therefore, it's a critical red flag that investors need to assess, suggesting further buying upside could face robust resistance by sellers at the current levels.

We postulate that unless the underlying markets demonstrate resilience, CVX is unlikely to maintain its medium-term bullish bias at the current levels. Therefore, given our views of the underlying markets, we believe CVX is primed for a deeper pullback from here, and a re-test of its July lows cannot be ruled out.

Accordingly, we reiterate our Sell rating on CVX.

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This article was written by

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I'm JR, the lead writer and founder of JR Research and Ultimate Growth Investing Marketplace service. Our team is committed to bringing more clarity to investors in their investment decisions.

Our marketplace service focuses on a price-action-based approach to growth and technology stocks, supported by fundamental analysis. In addition, our general SA site discusses stocks from various sectors and industries. 

Our discussion mainly focuses on a short- to medium-term thesis. While we hold stocks for the long-term, we also use appropriate opportunities to benefit from short- to medium-term swings, leveraging long (directionally bullish) or short (directionally bearish) set-ups. 

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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