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At 52-Week Highs, Can Chevron & Shell Soar Even Higher?
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Integrated energy stocks have been flying high on elevated oil prices, driven by robust global demand and tight supplies. The resurgence in oil prices on the one hand and strong cash flow from operations on the other helped the sector.
Riding on the momentum, shares of oil majors such as Chevron Corp. (CVX - Free Report) and Royal Dutch Shell plc hit their 52-week high levels on Thursday.
With oil slowly on the mend, shares in energy companies have recovered from their steep slump. At around $58 now, the contract has more than doubled from the dark days of February 2016 when the commodity fell to a 12-year low of just over $26 per barrel. Naturally, this has resulted in a major improvement in Chevron and Shell’s fundamentals, and subsequently their share prices.
Shares of Chevron hit a 52-week high of $125.35 on Dec 21, closing marginally lower at $124.82.
The oil major has gained 18.9% over the past six months, outperforming the industry’s gain of 16%. That said, we have noticed that the company has outperformed the industry in each of the one-month, three-month and one-year time frames. The stock now has a market cap of $227 billion.
Meanwhile, Shell, Europe’s biggest oil company, hit a 52-week high of $66.21 yesterday and closed at $66.18. The Hague-based Shell has seen its shares rise an even more impressive 25.8% over the last six months.
What Drove the Stocks Up?
Chevron: During the last nine months, Chevron reported a sharp year-over-year increase in cash flow from operating activities, which is a key metric to gauge the financial health of the firm. The company generated enough cash to pay off debt along with funding capex and dividend payments.
With commodity prices on their way up, Chevron reported net earnings of around $6.1 billion in the first nine months of 2017, turning around from the year-ago corresponding period’s net loss of $912 million. Importantly, the supermajor reported $14.3 billion in cash flow from operations, up from $9 billion in the year-ago period.
In the third quarter, Chevron generated $5.4 billion in operating cash flow, while shelling out around $5.2 billion in capital expenditures and dividends. This led to around $200 million in excess cash flows - something the company achieved for the first time since 2012. Going forward, we expect Chevron's free cash flow to improve significantly amid the company's initiatives in cost reduction, exiting unprofitable markets and streamlining the organization.
The diversified oil company has a long and consistent dividend paying record. It is one of the only two energy stocks on the list of Dividend Aristocrats - a group of 51 companies in the S&P 500 Index that have raised their payouts for more than 25 years in a row. Chevron has increased its dividend for 29 consecutive years compared to 34 for ExxonMobil Corp. (XOM - Free Report) , the other energy Dividend Aristocrat.
Finally, Chevron recently set its capital and exploratory budget at $18.3 billion, down by 4% from its 2017 projected investment of less than $19 billion. Next year's budget is also around 18% lower than the company’s 2016 spending of $22.4 billion and down 46% from the 2015 expenditure of $34 billion.
Revised downward for the fifth consecutive year, the second-biggest U.S. oil and gas group's cut in capital spending reflects Chevron's plans to optimize its expenses, while relying increasingly on shale drilling.
Shell: Hit by the industry downturn and weak financials owing to the $50-billion acquisition of BG Group, Shell began to pay dividend in the form of shares in 2015 to address cash flow woes. However, the supermajor is finally aborting the two-and-a-half-year long scrip dividend program as cost-containment efforts and divestment strategies have paid off. The company’s solid third-quarter results also underscore the fact that it has successfully adapted itself to thrive at $50-barrel crude.
On Management Day, which was observed last month, CEO of Shell — Ben van Beurden — announced the resumption of cash dividends from the fourth quarter of 2017. Beurden also announced plans to buy back shares of at least $25 billion by the end of 2020. With the buyback, Shell will be able to overcome the dilution problem under its scrip dividend plan that entitles investors to choose stocks as payout instead of cash.
Driven by synergies from its $50-billion BG Group acquisition last year and improving energy landscape, Shell has also raised its guidance for free cash flow, which has remained consistently strong over the last five quarters. The company now expects to generate $25-$30 billion by 2020 at Brent crude price of $60 a barrel.
With already closing $23 billion worth sales, the company is on track to achieve its $30 billion divestment target by 2018. Further, it announced asset disposals worth $2 billion and additional $5 billion divestment deals in advanced talks over and above the $23 billion completed.
Reaffirming its priorities to slash costs and cut debts, Shell, which ended the third quarter with debt to capital ratio of 25.4%, now aims to reduce the leverage to 20% on the back of operational efficiency and divestment spree.
Can the Stocks Continue to March Higher?
Chevron: We remain worried over signs of headwind in Chevron's U.S. production. The company produced 681 thousand oil-equivalent barrels per day in the third quarter, down 2.4% year over year and 2.9% sequentially. The poor performance in the region – coming despite output increases in the Gulf of Mexico and the Permian basin – could be attributed to asset sales and natural field declines in other areas.
Also, despite profit rising from a year earlier and Chevron transforming itself from a cash guzzler to a cash generator, we do not expect the company to raise its quarterly dividend at least through the first half of 2018.
The commodity price environment, while improving all the time, still remains challenging and Chevron might ideally want to strengthen its modest free cash flow surplus before rushing into a dividend hike. And while investors would like the company to make it 30 successive years of dividend increase, we believe Chevron would not want to undo its great work over the past couple of years. In fact, a flat but stable payout amid higher cash generation will ensure that more money can be put back into the company, making it stronger, financially healthier, and possibly a better income investment for the future.
Shell: While we conclude that Shell’s dividends are safe (despite the high yield of more than 5%) and the company is on track to deliver on its plan to produce free cash flow to support the payout, share price appreciation will be limited in the near-to-medium term. The future path of the supermajor will depend on whether it can generate enough free cash flow through the cycle to plough back into growth initiatives after maintaining its dividend.
Moreover, Royal Dutch Shell saw its third-quarter oil and gas production decline sequentially as well as from the year-ago period. The group's disposal program – though successful in reducing the company’s cost and enhancing cash flows – could further affect volume growth.
Finally, Shell still has some ground to cover in bringing down its debt. As of Sept. 30, 2017, the company had $20,699 million in cash and $88,356 million in debt (including short-term debt). Net debt-to-capitalization ratio was approximately 25.4%, down from 29.2% a year ago following the BG Group acquisition but well above Shell’s desired 20%.
Zacks Rank & Stock Picks
Chevron and Shell both currently carry a Zacks Rank #3 (Hold), implying that they are expected to perform in line with the broader U.S. equity market over the next one to three months.
London-based BP is one of the largest publicly traded oil and gas companies in the world. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses. The 2017 Zacks Consensus Estimate for this company is $1.79, representing some 116.1% earnings per share growth over 2016. Next year’s average forecast is $2.39, pointing to another 33.3% growth.
Headquartered in Stavanger, Norway, Statoil is a major international integrated oil and gas company. Though the company has operations in all major hydrocarbon-producing regions of the world, it has an upstream focus on the Norwegian Continental Shelf. Statoil’s expected EPS growth rate for three to five years currently stands at 24.2%, comparing favorably with the industry's growth rate of 8.5%.
Looking for Stocks with Skyrocketing Upside?
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Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
Image: Bigstock
At 52-Week Highs, Can Chevron & Shell Soar Even Higher?
Integrated energy stocks have been flying high on elevated oil prices, driven by robust global demand and tight supplies. The resurgence in oil prices on the one hand and strong cash flow from operations on the other helped the sector.
Riding on the momentum, shares of oil majors such as Chevron Corp. (CVX - Free Report) and Royal Dutch Shell plc hit their 52-week high levels on Thursday.
With oil slowly on the mend, shares in energy companies have recovered from their steep slump. At around $58 now, the contract has more than doubled from the dark days of February 2016 when the commodity fell to a 12-year low of just over $26 per barrel. Naturally, this has resulted in a major improvement in Chevron and Shell’s fundamentals, and subsequently their share prices.
Shares of Chevron hit a 52-week high of $125.35 on Dec 21, closing marginally lower at $124.82.
The oil major has gained 18.9% over the past six months, outperforming the industry’s gain of 16%. That said, we have noticed that the company has outperformed the industry in each of the one-month, three-month and one-year time frames. The stock now has a market cap of $227 billion.
Meanwhile, Shell, Europe’s biggest oil company, hit a 52-week high of $66.21 yesterday and closed at $66.18. The Hague-based Shell has seen its shares rise an even more impressive 25.8% over the last six months.
What Drove the Stocks Up?
Chevron: During the last nine months, Chevron reported a sharp year-over-year increase in cash flow from operating activities, which is a key metric to gauge the financial health of the firm. The company generated enough cash to pay off debt along with funding capex and dividend payments.
With commodity prices on their way up, Chevron reported net earnings of around $6.1 billion in the first nine months of 2017, turning around from the year-ago corresponding period’s net loss of $912 million. Importantly, the supermajor reported $14.3 billion in cash flow from operations, up from $9 billion in the year-ago period.
In the third quarter, Chevron generated $5.4 billion in operating cash flow, while shelling out around $5.2 billion in capital expenditures and dividends. This led to around $200 million in excess cash flows - something the company achieved for the first time since 2012. Going forward, we expect Chevron's free cash flow to improve significantly amid the company's initiatives in cost reduction, exiting unprofitable markets and streamlining the organization.
The diversified oil company has a long and consistent dividend paying record. It is one of the only two energy stocks on the list of Dividend Aristocrats - a group of 51 companies in the S&P 500 Index that have raised their payouts for more than 25 years in a row. Chevron has increased its dividend for 29 consecutive years compared to 34 for ExxonMobil Corp. (XOM - Free Report) , the other energy Dividend Aristocrat.
Finally, Chevron recently set its capital and exploratory budget at $18.3 billion, down by 4% from its 2017 projected investment of less than $19 billion. Next year's budget is also around 18% lower than the company’s 2016 spending of $22.4 billion and down 46% from the 2015 expenditure of $34 billion.
Revised downward for the fifth consecutive year, the second-biggest U.S. oil and gas group's cut in capital spending reflects Chevron's plans to optimize its expenses, while relying increasingly on shale drilling.
Shell: Hit by the industry downturn and weak financials owing to the $50-billion acquisition of BG Group, Shell began to pay dividend in the form of shares in 2015 to address cash flow woes. However, the supermajor is finally aborting the two-and-a-half-year long scrip dividend program as cost-containment efforts and divestment strategies have paid off. The company’s solid third-quarter results also underscore the fact that it has successfully adapted itself to thrive at $50-barrel crude.
On Management Day, which was observed last month, CEO of Shell — Ben van Beurden — announced the resumption of cash dividends from the fourth quarter of 2017. Beurden also announced plans to buy back shares of at least $25 billion by the end of 2020. With the buyback, Shell will be able to overcome the dilution problem under its scrip dividend plan that entitles investors to choose stocks as payout instead of cash.
Driven by synergies from its $50-billion BG Group acquisition last year and improving energy landscape, Shell has also raised its guidance for free cash flow, which has remained consistently strong over the last five quarters. The company now expects to generate $25-$30 billion by 2020 at Brent crude price of $60 a barrel.
With already closing $23 billion worth sales, the company is on track to achieve its $30 billion divestment target by 2018. Further, it announced asset disposals worth $2 billion and additional $5 billion divestment deals in advanced talks over and above the $23 billion completed.
Reaffirming its priorities to slash costs and cut debts, Shell, which ended the third quarter with debt to capital ratio of 25.4%, now aims to reduce the leverage to 20% on the back of operational efficiency and divestment spree.
Can the Stocks Continue to March Higher?
Chevron: We remain worried over signs of headwind in Chevron's U.S. production. The company produced 681 thousand oil-equivalent barrels per day in the third quarter, down 2.4% year over year and 2.9% sequentially. The poor performance in the region – coming despite output increases in the Gulf of Mexico and the Permian basin – could be attributed to asset sales and natural field declines in other areas.
Also, despite profit rising from a year earlier and Chevron transforming itself from a cash guzzler to a cash generator, we do not expect the company to raise its quarterly dividend at least through the first half of 2018.
The commodity price environment, while improving all the time, still remains challenging and Chevron might ideally want to strengthen its modest free cash flow surplus before rushing into a dividend hike. And while investors would like the company to make it 30 successive years of dividend increase, we believe Chevron would not want to undo its great work over the past couple of years. In fact, a flat but stable payout amid higher cash generation will ensure that more money can be put back into the company, making it stronger, financially healthier, and possibly a better income investment for the future.
Shell: While we conclude that Shell’s dividends are safe (despite the high yield of more than 5%) and the company is on track to deliver on its plan to produce free cash flow to support the payout, share price appreciation will be limited in the near-to-medium term. The future path of the supermajor will depend on whether it can generate enough free cash flow through the cycle to plough back into growth initiatives after maintaining its dividend.
Moreover, Royal Dutch Shell saw its third-quarter oil and gas production decline sequentially as well as from the year-ago period. The group's disposal program – though successful in reducing the company’s cost and enhancing cash flows – could further affect volume growth.
Finally, Shell still has some ground to cover in bringing down its debt. As of Sept. 30, 2017, the company had $20,699 million in cash and $88,356 million in debt (including short-term debt). Net debt-to-capitalization ratio was approximately 25.4%, down from 29.2% a year ago following the BG Group acquisition but well above Shell’s desired 20%.
Zacks Rank & Stock Picks
Chevron and Shell both currently carry a Zacks Rank #3 (Hold), implying that they are expected to perform in line with the broader U.S. equity market over the next one to three months.
Meanwhile, one can look at Zacks Rank #1 (Strong Buy) stocks like BP plc (BP - Free Report) and Statoil ASA . You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
London-based BP is one of the largest publicly traded oil and gas companies in the world. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, and other energy-related businesses. The 2017 Zacks Consensus Estimate for this company is $1.79, representing some 116.1% earnings per share growth over 2016. Next year’s average forecast is $2.39, pointing to another 33.3% growth.
Headquartered in Stavanger, Norway, Statoil is a major international integrated oil and gas company. Though the company has operations in all major hydrocarbon-producing regions of the world, it has an upstream focus on the Norwegian Continental Shelf. Statoil’s expected EPS growth rate for three to five years currently stands at 24.2%, comparing favorably with the industry's growth rate of 8.5%.
Looking for Stocks with Skyrocketing Upside?
Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.
Ignited by new referendums and legislation, this industry is expected to blast from an already robust $6.7 billion to $20.2 billion in 2021. Early investors stand to make a killing, but you have to be ready to act and know just where to look.
See the pot trades we're targeting>>