What’s Next For Chevron’s Stock?

Up 10% in the last year, at the current price of around $156 per share (as of Dec 11), we believe Chevron Corporation (NYSE: CVX), a company manufacturing and selling a range of refined petroleum products, including gasoline, diesel, marine, and aviation fuels, premium base oil, finished lubricants, and fuel oil additives – could see modest gains in the longer term. The company’s stock gains are below the S&P 500 which gained about 31% over the same period and also below peer Exxon Mobil (NYSE: XOM) which is up 14% over the same period. So what’s happening with Chevron’s stock?

Chevron’s relatively poor stock performance compared to its peer is likely the result of investor concerns surrounding Chevron’s pending $53 billion acquisition of Hess. The deal appears to be a good one from a strategic perspective. Upon closing the deal, Chevron will acquire 465,000 acres in the Bakken Shale and add substantial oil-equivalent production to its already expansive portfolio in Guyana. However, there’s a major roadblock. This uncertainty adds stock specific risk for investors. However, if you want upside with a smoother ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

The possible snag to Chevron’s acquisition plans relates to Hess and Exxon being partners in a large energy project in Guyana, and XOM believes it has the right to buy Hess out of the project if it sells itself to Chevron. That project is likely one of the main reasons why Chevron wants to buy Hess, so this could rush the Hess acquisition or, at the very least, make it a less desirable purchase. CVX shares are facing the brunt of this uncertainty because of the doubts around a very large acquisition. Although the Federal Trade Commission cleared the transaction, it prohibited John Hess from joining Chevron’s board of directors.

The decrease in CVX stock over the last 3-year period has been far from consistent, with annual returns being more volatile than the S&P 500. Returns for the stock were 46% in 2021, 58% in 2022, and -14% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is much less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could CVX face a similar situation as it did in 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Oil Price Overview

Overall, Brent crude oil is at $~74, at the time of writing. Despite the OPEC+ group’s recent decision to extend their production cut, weakness continued in global oil markets on the back of slowing demand from China and rising U.S. supplies. Escalating geopolitical tension also added pressure on the demand outlook of the commodity. Oil has been trading in a tight range this year and broadly congested between $69-$91 per barrel on worries that supplies will exceed demand. Chevron has a diversified business with exposure to the entire energy value chain, but still, oil prices are a big driver of financial performance. The price of crude oil has recovered lately as stronger policy signals from Chinese authorities have once again rekindled expectations of greater stimulus measures in 2025. That said, Chevron’s strong balance sheet will likely pave the way for longer-term gains. Even if oil trends lower, Chevron is among the lowest-cost producers and generates more of its revenue, collectively, from its midstream (transmission pipelines) and downstream operations (chemical and refineries) than it does from drilling.

Q3 Snapshot

Chevron’s Q3 net income came in at $4.49 billion, or $2.48 per share, down 31% from $6.53 billion, or $3.48 per share, in the third quarter of 2023. When adjusted for foreign currency impacts, the company reported earnings of $2.51 per share, beating Wall Street’s expectations for the quarter. The profits declined y-o-y due to lower margins on refined product sales, lower crude oil prices, and the absence of favorable tax treatment. The energy giant booked revenue of $50.67 billion, beating market expectations but declining 6% year-over-year (y-o-y). Chevron produced 3.36 million oil-equivalent barrels per day in the quarter, up  7% y-o-y, driven by record output in the Permian Basin and the acquisition of PDC Energy. It should be noted that U.S. natural gas realization plunged 60% y-o-y while international realization grew 7% in Q3.

We forecast CVX’s Revenues to be $196 billion for the fiscal year 2024, almost flat y-o-y. Looking at the bottom line, we now forecast EPS to come in at $10.41. Given the changes to our revenues and earnings forecast, we have revised our CVX’s Valuation to $161 per share, based on $10.41 expected EPS and a 15.5x P/E multiple for the fiscal year 2024 – 3% higher than the current market price. It should be noted that we use core sales revenue (which comes from the sale of hydrocarbons) figures that exclude the revenue it generates from the distribution, processing, and marketing of hydrocarbon and other sources of income.

Chevron is aiming to streamline its portfolio, with asset sales in Canada, Congo, and Alaska expected to close in the fourth quarter of 2024. The company is also targeting $2 billion to $3 billion in cost reductions from 2024 through the end of 2026.

It is helpful to see how its peers stack up. CVX Peers shows how Chevron’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 12/12/2024
[2] Cumulative total returns since the end of 2016

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