Ohen it comes to the energy sector, a few names stand out, and Chevron (NYSE: CVX) is one of them. With a massive market cap of $285 billion, it’s easily one of the largest oil and natural gas producers on the planet. And it has a long history of operational success and dividend growth. It’s a great energy option, but only if you think long term. Here are three reasons why you might want to buy it and one reason to avoid it.
1. Diversified portfolio
Although oil and natural gas prices are the primary driver of Chevron’s earnings and bottom line, its business is spread across the entire energy landscape. This includes all of upstream drilling operations to downstream chemical and refining companies. It provides a bit of balance to the results, often softening the blow when energy prices fall. This is notable because commodity prices are volatile and often move dramatically. Having even a modest lag helps smooth out performance over time.
2. Financial strength
Another notable facet of Chevron’s business is that management has long focused on having a rock-solid structure. balance sheet. To put a figure on this, the oil giant’s debt ratio is around 0.2 times today. That’s lower than all of its closest peers.
The significance of this is that having low leverage allows Chevron to lean on its balance sheet during energy downturns so it can continue to support its capital investment plans and its dividend (more on dividends in a second). For example, the 2020 pandemic oil price drop pushed Chevron’s debt ratio up more than 0.3x, a trend that has since reversed now that the energy sector is once again in a slump. reprise. Clearly, the flexibility afforded by low leverage has been put to good use.
3. Reliable dividends
This brings the story to Chevron’s dividend, which has increased every year for more than three decades. This makes the company a Dividend Aristocrat. If you’re a dividend investor looking for energy exposure, the 3.9% yield here, coupled with a strong payout track record, should be quite attractive.
However, it would not be right to stop there. Oil and natural gas are highly cyclical and, as noted, subject to dramatic price fluctuations. For Chevron to have amassed this type of dividend record is nothing short of remarkable. It shows management’s commitment to shareholders, and that deserves special mention.
While these are all good reasons to buy Chevron, there’s a reason you might not want to. Oil and gas prices are relatively high today and the stock, although off recent highs, is still up from its pandemic lows. Given that oil prices remain quite high, there is potentially more downside risk for the stock in the near term than upside potential.
The company is, fundamentally, designed to navigate the long-term ups and downs of the industry, specifically smoothing short-term swings. This is a core energy portfolio that will not maximize upside like a pure-play producer such as Conoco Phillips (NYSE:COP) would have. Chevron is simply not the type of investment you will want to own if you are looking to time oil price movements.
There is no doubt that Chevron will benefit from higher prices, but not to the same degree as a name like ConocoPhillips. And while Chevron will, to some extent, protect you on the downside, that’s not exactly the point if you’re trying to time energy price moves. If you expect oil to go down, shorting a stock like ConocoPhillips would probably make more sense than shorting Chevron.
Ultimately, Chevron is designed to be a long-term investment in the energy industry. That’s why it has a diverse business model and strong finances and pays particular attention to rewarding investors with dividend increases. However, all of these characteristics generally mean that it is not an ideal way to play on short-term oil price movements, as Chevron will not maximize upside or downside with its stablecoin approach. If you’re looking to add an energetic name to your otherwise diverse portfolio, Chevron could be a solid option, but only if you’re looking to hold onto it for a long time.
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