- Chevron has performed poorly over the last month even as crude oil prices continued to power ahead.
- Chevron is now trading at similar levels as it did in 2011 when crude oil prices were substantially higher.
- Future earnings are already priced into the share price. Investors getting long now should be very cautious due to downside risk.
Chevron's (NYSE:CVX) recent quarter was disappointing to say the least. Reporting an EPS of -$0.39 compared to $1.38 in the same quarter of 12 months prior made its cash flow figures look awful which is why I can't see a dividend hike in the near term. The worrying thing for dividend investors is that the Chevron stock has rallied almost 24% since January but has traded basically flat for the past 4 weeks due to the stock coming up against resistance. Therefore from a capital gains point of view, it looks like future earnings are priced in, which is why I don't see huge upside potential in the stock.
One has to remember that many US shale players will come back on the scene and start drilling once crude oil trades over $50 a barrel. This at the very least will keep crude oil trapped in a trading range or at the most will boost supply which could mean lower prices once more.
So if the capital gains argument isn't that strong, does investing for the dividend hold up with the stock trading at over $100? I don't think so and all one has to look at is 2015 figures to realize that the dividend will not be hiked any time soon. Last year, the company paid out $4.25 in dividends per share (or $8 billion) but brought in only $2.45 in earnings per share (or $4.59 billion in net income).
Although I believe the cash flow shortfall is temporary because the company will be able to realize higher oil prices in upcoming quarters, lower operating expenses and raise its production, Chevron still believes it won't be cash flow neutral until the end of 2017 and it will need brent atleast at $52 to do so. Therefore I can't see any major dividend increases in the near term especially with the company having earmarked another $2 billion in divestitures this year and heavy capex reductions to bring annual spend to under $20 billion after next year.
When the price of crude oil slumped to around $40 a barrel in 2009, it rebounded quickly and Chevron was still able to report revenues of $171 billion on earnings per share of $5.24. Chevron's average share price in 2009 was around $68 a share. Now fast forward to 2015 where the company did $138 billion in top line revenue and $2.45 in earnings per share despite the share price trading over $90 a share for at least 6 months of the year. Yes earnings are predicted to substantially improve in 2017 ($4.57 EPS predicted) but because of the "cap" new fracking technology is going to put on oil prices, I can't see Chevron's profits returning to 2011 and 2012 levels. Therefore with its share price currently at over $100 a share, I believe 2017 profits are priced in especially if crude oil stays in a trading range of between $50 and $55 a barrel.
Therefore if one is holding Chevron stock at present, selling covered calls seems to be a prudent action at this stage. The January 2017 (228 days away) $105 call options are currently selling for about $390 (per 100 shares) which along with the two upcoming dividends (in August & November) would give the investor $504 in income over the next 7.5 months. This would result in an annualized yield of 8% as long as the shares would not be at $105 or more by the expiration date. The chart below illustrates why I believe the shares will not get to $105 any time soon. The stock is stretched too far above Chevron's 200 day moving average of around $87. I see this coming back into sync before we see any sustained move higher.
To sum up, I believe that the prudent course of action presently for investors who are long the stock is to sell some call options against your long stock to bring in additional income. I just don't see any trigger that can catapult Chevron's price forward at present. All the positives that were discussed on the company's most recent earnings call such as higher production, lower costs and higher upstream earnings have all been priced into the stock at this stage.
And although crude oil has rallied significantly this year, I can't see the price surpassing $50-$55 for a sustained period of time. Remember since Chevron's profits are heavily dependent on its upstream divisions (rising oil prices), 2012 type returns cannot repeat in the near term without crude oil prices returning to $80+ a barrel at least. Chevron stock has much more downside risk at present so invest with caution.