With oil and gas within energy having become one of the least favorite industries in a more socially conscious world, it has to be puzzling to some investors that even the major oil and gas stocks have come close to doubling off their lows during the panic selling. Despite some of the more speculative companies (even the bankruptcy candidates) rising exponentially off of their lows, there does come a time where sometimes the stock market and investors put too much good news and positive gains into a story. That’s when stocks “get over their skis.”
It appears that the oil recovery back to almost $40.00 and the continued stock market recovery allowed shares of Chevron Corporation (NYSE: CVX) to get over its skis. After bottoming out at just above $50, Chevron’s stock price reached just above $103.50 briefly this week before selling off a few percent and dipping back under $100.
There are some recent analyst calls suggesting that the surge in Chevron’s stock may have gone too far. As a reminder, no single analyst call should be used as a sole reason to buy or sell any stock. The same would apply to two analyst calls, but what are investors supposed to think when more and more opinions are being issued that the upside has either ended or may be much more limited?
One other observation by 24/7 Wall St. would be that the calls still projecting upside with positive analyst ratings just are not strong enough upside in a fair risk/reward analysis considering the secular clouds hanging over the oil and gas sector. The current state of the market has been that both Chevron and Exxon Mobil Corporation (NYSE: XOM) are considered among the oil players still winning out in 2030. That said, some analyst comments have been more cautious based on investors having piled back into Chevron based on it having a stronger balance sheet while other oil and gas stocks are fighting bankruptcy.
Two analyst calls were seen on Wednesday, June 10, 2020. The big call came from RBC Capital markets, where the firm lowered its rating to Underperform from Sector Perform with a $100 price target.
The second call came from Goldman Sachs with the firm reiterating its Buy rating but raising its price target to $112 from $105. While an upgrade sounds good, energy investors are likely to feel any major excitement. They already know about the 5% dividend yield, but many investors are definitely going to observe that 10% price appreciation is just not worth a much greater potential downside risk that the energy sector has proven there may be.
BofA Securities downgraded Chevron to Neutral from Buy on June 9 and the firm kept its $110 price target. While the firm had just previously confirmed its position on a model income portfolio with a 2% weighting and better than a 5% dividend yield, the stock had just risen back up too much for BofA’s liking.
On June 8, J.P. Morgan maintained its Overweight rating and raised its target price up to $109 from $103. That’s a positive call, but is $8.00 of upside worth the risk to buy an oil stock after its shares had rallied $50 from the panic-selling lows?
Chevron may be downgrading itself as well, or at least its workforce. Reports were out at the end of May that the oil giant was planning to make a round of layoffs for up to 6,000 or more of its employees. Other reports were out that Chevron was facing risk to certain large projects due to additional outbreaks of COVID-19. One project that was honed in was the Tenzig oil project in Kazakhstan after an outbreak in that region.
The independent research firm CFRA maintained a Hold rating along with a $98 price target on June 6. The call was after a recent downgrade from Buy. And while CFRA sees Chevron having the strongest balance sheet of the majors, CFRA noted that it could not get too excited about Chevron’s prospects based on a relatively rich valuation on its forward earnings and cash flow prospects. The Permian Basin had been cited as a key driver in the oil company’s prior growth strategy but now sees the Permian as a key victim of the company’s recent capital spending cuts that are coming soon.
Chevron’s $187 billion market cap comes with a consensus analyst price target of $98.19 from Refinitiv. Rival Exxon Mobil Corporation (NYSE: XOM) has roughly a $200 billion market cap but its $52.00 share price is up less than Chevron’s as its lows in this panic selling wave was down closer to $30.00.
Exxon Mobil’s consensus price target is also still quite close by at $50.15, but BofA Securities is again bullish on Exxon Mobil. Its old $100+ price target is now just $80.00. That is still far more upside projected at this one firm. Their view is that Exxon Mobil is poised to see a relative recovery after several years of lagging. The firm was positive about Exxon’s upstream portfolio leverage having been masked (or hidden) by the recent oil price collapse. The firm also pointed out that Exxon Mobil has now begun more than 30 major projects with stronger cash margins compared to its legacy base business.
Exxon Mobil out-yields Chevron with a 6.5% dividend yield. That said, investors are unlikely just to choose these companies based on their dividends. Chevron’s dividend is deemed to be a bit safer than rival Exxon Mobil, but if oil craters yet again any time soon then there may be (nor should there be) anything close to a “safe” dividend in the oil and gas sector.
It is still without argument that Chevron has the best perceived balance sheet of the majors, but sometimes investors pile too much capital into one leader versus another. And sometimes dividend investors just cannot help themselves by chasing a much higher dividend yield, even when they are supposed to know better.
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