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Analyst Blog

Shares of Chevron Corp. (CVX - Analyst Report) hit a 52-week high of $122.33 on May 2. In fact, the San Ramon, Calif.-based energy giant has seen its stock price climb some 10% since the beginning of the year. This price appreciation can be attributed to the consistency in its earnings/cash flows, attractive fundamentals and a shareholder friendly financial policy.

Why the Bullishness?

Chevron’s current oil and gas development project pipeline is among the best in the industry – targeting volume growth of 25% by 2017 – driven by the big Australian liquefied natural gas (LNG) projects (Gorgon and Wheatstone), as well as deepwater developments in the U.S. Gulf of Mexico.

While commodity prices are expected to stay lukewarm and adversely impact upstream profits, Chevron's ability to generate earnings from the downstream unit provides it with a competitive advantage.

The company’s financial flexibility and strong balance sheet are real assets in this highly-uncertain period for the economy. Chevron remains in excellent financial health, with $17 billion in cash on hand and an investment-grade credit rating with a debt-to-capitalization ratio of just over 9%.

Management has established quite a track record of conservative capital management and cash returns to shareholders. The second-largest U.S. oil company by market value after Exxon Mobil Corp. (XOM - Analyst Report) also pays a growing dividend, currently yielding an attractive 3.3%.

However, due to its integrated nature, Chevron is particularly susceptible to the downside risk from any weakness in the global economy. We are also concerned by the company’s high level of capital spending, which may result in reduced returns going forward.

This accounts for Chevron’s current Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Stocks to Consider

With Chevron shares trading at all-time highs, any upside from here may be limited. Meanwhile one can look at some domestic upstream energy firms like EPL Oil & Gas Inc. and Harvest Natural Resources Inc. (HNR - Snapshot Report) as attractive investments. These U.S. exploration and production companies – sporting a Zacks Rank #1 (Strong Buy) – offer value and are worth accumulating at current levels.
 

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