Chevron Corporation (CVX Quick QuoteCVX - Free Report) is a leading integrated energy player. This Zacks Rank #3 (Hold) company’s earnings beat estimates in three of the last four quarters and missed the same in one. The Zacks Consensus Estimate for CVX’s 2024 and 2025 earnings per share (EPS) is pegged at $13.13 and $15.58, respectively.

What's Favoring Chevron?

The oil industry is extremely competitive and volatile. Small changes in demand or actions taken by petroleum-rich countries such as Saudi Arabia and Russia, whose interests may conflict with those of the industry's publicly traded companies, can have an adverse impact on the industry. Furthermore, supply and demand imbalances can cause significant fluctuations in oil prices. The year-to-date increase in oil prices above $85 has been primarily driven by growing concerns about a tighter global supply.

Growing conflicts in the Middle East, coupled with heightened tensions between Russia and Ukraine and recent drone attacks on Russian refineries, significantly influenced the price surge. People expect OPEC+ to extend production cuts into June. Moreover, a decrease in the U.S. rig count also added to the upward pressure on oil prices.  The upward trend in oil prices benefits Chevron's upstream operations and project pipeline in the Permian Basin. Here's why:

Rising Oil Prices, Rising Profits: Oil prices have been on the upswing, and that's good news for Chevron. As a major oil producer, CVX benefits directly from a strong oil market. Higher prices translate to higher profits for the company.

Production on the Rise: Chevron is positioned for significant production growth in 2024. The company's acquisition of PDC Energy and its continued strength in the Permian Basin are expected to boost output by 4-7% year over year. This means that Chevron's reserves will get even more oil.

Hess Acquisition Boosts Portfolio: The recent acquisition of Hess Corporation adds valuable assets to Chevron's portfolio. Hess' holdings in Guyana and North Dakota's Bakken Formation are particularly promising, giving Chevron’s access to new sources of high-quality oil.

Financially Strong: CVX boasts a healthy financial position. It has a comfortable amount of cash on hand and a low debt-to-capitalization ratio. This financial strength allows Chevron to invest in growth opportunities while maintaining a strong credit rating, which keeps borrowing costs low.

Rewarding Shareholders:  Chevron is committed to rewarding its shareholders. The company recently increased its quarterly dividend by 8% and announced a $75 billion stock repurchase program. This means that investors can expect to see a steady stream of income from CVX holdings.

Overall, Chevron is a well-run oil company with a bright future. Rising oil prices, production growth, a strategic acquisition and commitment to shareholders make CVX an attractive option for investors seeking stability and growth.

What’s Hurting the Stock?

Exposure to Commodity Price Cycles: Chevron's core business is exploration and production (upstream) of oil and gas, making it vulnerable to boom-and-bust cycles in commodity prices. The significant earnings drop in 2023 exemplifies this risk.  Unlike companies with more control over pricing, Chevron's profitability hinges on external factors beyond its direct control. Chevron's earnings dropped in 2023 due to lower oil and gas prices and reduced refining profits, highlighting the challenges in staying profitable amid market changes.

Cost Pressure and Margin Squeeze:  Chevron faces multiple cost headwinds. Overall operating expenses (as a percentage of revenue) are trending upward, and inflationary pressures threaten to squeeze margins further. Rising labor costs, materials, and potential supply-chain disruptions could strain profitability. Additionally, if Chevron cannot raise prices proportionately to offset inflation, it could adversely impact the company's bottom line.

Uncertainty in Energy Transition:  The global shift toward renewable energy sources presents a long-term challenge for oil and gas companies. Chevron may need to invest heavily in new technologies and business models to adapt to the changes while facing potential regulatory restrictions and declining demand for its core products. Investors may be wary of an uncertain future.

Environmental Concerns:  Compared to some European peers, Chevron has been slower at reducing emissions and investing in renewable energy. This could be a significant turnoff for environmentally conscious investors, who are increasingly prioritizing sustainability factors in their investment decisions.

Stocks to Consider

Some better-ranked stocks for investors interested in the energy sector are Murphy USA Inc. (MUSA Quick QuoteMUSA - Free Report) , Archrock, Inc. (AROC Quick QuoteAROC - Free Report) and Sunoco LP (SUN Quick QuoteSUN - Free Report) , each sporting a Zacks #1 Rank (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Murphy USA is valued at approximately $8.75 billion. In the past year, the company’s shares have surged 64%.

MUSA markets retail motor fuel products and convenience merchandise, operating retail stores under the brands Murphy USA, Murphy Express and QuickChek.

Archrock is valued at $3.25 billion. The company currently pays a dividend of 66 cents per share, or 3.18%, on an annual basis.

AROC, together with its subsidiaries, works as an energy infrastructure company in the United States. The company operates under two segments — Contract Operations and Aftermarket Services.

Sunoco is valued at $6.02 billion. It is a major wholesale motor fuel distributor in the United States, distributing over 10 fuel brands through long-term contracts with more than 10,000 convenience stores, thereby ensuring consistent cash flow.

SUN’s extensive distribution network across 40 states provides a robust and reliable source of income, and the Brownsville terminal expansion should add to its revenue diversification.