Despite surging oil prices, Chevron (CVX) failed to generate an appreciable rally on Monday. In fact, the stock traded in a negative trend by closing below the open and failing to top multiple resistance points at $125. My investment thesis had turned tepidly bullish, if the stock could break above this pivot point.
Improving Cash Flows
My view on Chevron has turned less bearish over the last year as the energy giant starts generating solid cash flows and returns capital to shareholders. In addition, the chart shows a stock flat for the last few years with the potential of eventually breaking above $125.
The whole problem with Chevron rallying back above $120 all the way back in 2013 was the lack of cash flows. Now, Chevron is generating quarterly operating cash flows in the $8 billion range when Brent oil prices are above $60/bbl. With the energy giant spending about $5 billion per quarter on Capex, the company is generating around $4 billion in free cash flows on a quarterly basis now.
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Source: Chevron September 2019 presentation
The key here is a company and an industry no longer interested in spending more and more to get more oil out of the ground. Chevron is still forecasting flat to down capex spending in 2020 at $20 billion or below. Even a slight increase in spending starting in 2021 doesn’t alter the equation.
Source: Chevron September 2019 presentation
The company is forecasting spending $4 billion on share buybacks this year along with a nearly 4% dividend yield. Unfortunately, with a market valuation of $235 billion, Chevron’s shareholders aren’t going to see much benefit from a minimal $4-billion share buyback. Honestly, the company would probably be better to stash the cash on the balance sheet and wait for the next down cycle in oil to repurchase shares on weakness versus up here around $125.
Oil Record Didn’t Help
Brent crude surged 15% on Monday for the largest single-day rally in oil, yet Chevron didn’t even hold a 4% rally on the day. Part of the problem with the energy giant is the dividend yield stuck at 4% when the stock reaches $125.
The dividend yield does have a history of trading down to the 3% range over the last decade. Investors likely aren’t impressed with the payout ratio, considering the ~$9 billion in annual dividend payments when combined with the capex leaves very limited spare cash. The company is spending $4 billion on share buybacks this year and it uses up virtually all the spare cash Chevron is generating this year.
For this reason, the stock is pulling back from the $125 level again. Investors appear only interested in buying the stock up to a 4% dividend yield this time around.
The energy giant has solid cash flows around Brent crude at $60/bbl, but the risk likely remains that oil heads lower. CNBC is already reporting that Saudi output will return faster than originally forecasted, sending Brent crude prices down 5% to $65/bbl.
Between Saudi having ample storage listed at over 150 million barrels of oil and President Trump committing to release oil from the strategic reserves that amount to over 644 million barrels of oil, the market is awash with oil supplies. Short-term supply interruptions just aren’t going to change the equation for the stock.
The key investor takeaway is that investors should watch how Chevron trades around $125. The stock becomes a buy when the key resistance is broken, but investors have to wonder if this is ever going to occur. Investors should stay on the sidelines until the stock provides a better signal.
Disclosure: I/we 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.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.