- Chevron stock has come up against resistance at its 200 week moving average. Crude oil, however, has much more upside.
- The present share price of $100 has a lot of future upstream earnings baked into the price .
- Even though crude oil prices have jumped, Chevron has to keep on cutting costs and cap-ex to ensure cash flows are sufficient for operations and dividends.
I have always been a fan of Chevron (NYSE:CVX) stock mainly because of its fundamentals and the commitment to the dividend for its shareholders. Furthermore, it was fascinating to see Chevron invest right through the down-cycle in oil over the last 2 years as other oil companies went to the wall. However, we may be seeing signs that Chevron stock could be topping. If we look at the long term chart of Chevron below, we can see that its 200 week moving average is acting as resistance at present and even if we break through in the next couple of weeks, I don't see a lot of extra upside in this stock. The long term chart illustrates that $15 to $20 a share has been the maximum the stock has been above this average but crude oil is telling us a different story. Crude oil is still almost $30 below its 200 week moving average which illustrates there is far more upside in crude than Chevron at present.
The present situation with Chevron reminds me how the stock improved its earnings and sales meaningfully from 2009 to 2010. In 2009, Chevron's stock on average was trading for around $70 a share and the company did $171 billion in revenue and $10.5 billion in net income. The following year, the stock jumped only to around an average of $80 despite reporting $204 billion in revenue and $19 billion in net income. So why did the share price move so little compared to the huge leap in net income for example ? Because higher earnings were already baked into the share price. 2016 has been really like 2009 so far in that both years experienced V- shaped rallies in crude which is why I believe Chevron stock won't rally much from these levels.
It remains to be seen whether the decision to maintain the dividend right throughout this down cycle will affect the company's earnings trajectory going forward, Chevron has been playing a balancing act over the last 18 to 24 months between taking on more debt, selling off assets and cutting costs which in the end enabled the company keep its lucrative dividend. But will this come at a cost? It has been just announced that Chevron has to lay off another 800 staff this year which illustrates the measures the company has had to go to to keep cash under control whilst also keeping production elevated.
Ongoing asset sales will probably be needed this year as Chevron is looking at further cash flow deficit. In the near term, the company has the benefit of near term production growth from major projects which will improve operational cash flow. However, the value of the company's assets has been falling whereas the debt count has been rising which is why the stock has come against resistance for the time being.
Chevron stock is now trading at similar levels to 2011 when the company did $253 billion in revenues and almost $26 billion in net income. Granted that oil prices were up around $100 a barrel back then but Chevron is still predicted to only deliver $1.18 in earnings per share. Oil's recent rally has not affected analysts opinions regarding Chevron's 2016 earnings. Therefore, until we get a breakout in earnings projections here, I wouldn't suggest scaling into Chevron stock just yet.
To sum up, if you are long Chevron stock, it might be a prudent play if you took some capital off the table. Why? Well although crude oil is still trading well below its mean, Chevron's stock price has hit resistance and doesn't seem able to break through despite crude oil going higher. This leads me to believe that the stock could easily break down if oil were to have a sharp decline from these levels. Chevron still has cash flow problems which were underlined by the announcement of more job losses in the near term. Meaningful production growth and more operational cash flow have already been priced into this stock so an upside potential is limited in my opinion.