06 Apr Chevron (CVX)

The coronavirus which has swept the world in 2020 has sent shockwaves through global markets as economies experience a shutdown not seen in the lifetimes of the vast majority of us. The economic impact has already been disastrous and we still don’t know how long the pandemic will take to play out.

It’s an environment where only the strongest of companies will endure. Those with the strongest balance sheets will be the ones to survive the carnage, and will then be the ones able to quickly expand again when the market eventually turns around. Our stock report for today is just one of those companies.

There’s no doubting that the world is in turmoil and so are equity markets. But in times of great turmoil come great buying opportunities. Bottom fishers are finding bargains in all sorts of segments, but no segment has been hit harder than the oil industry.

In what proved to be calamitous timing for stock portfolios worldwide two of the biggest players in world oil decided to pick a fight with each other just as a viral pandemic, the likes of which we haven’t seen in a century, branched out from China and took hold across the globe.

Demand for oil was already falling thanks to the virus, with Saudi Arabia calling for output cuts amongst OPEC nations to contain the hurt it was experiencing. When Russia refused and walked away from the negotiating table the Saudis, instead of curtailing production themselves did the opposite, ramping up production and flooding the already oversupplied market. This, of course, led to the largest one-day drop in oil prices in 30 years.

While West Texas crude started the year at around $60 a barrel, it quickly dropped to $20 last week. Levels not seen since the last great price plunge from 2014-2016. It has left almost all of the oil companies reeling. The fall in price will see many smaller oil companies go under, unable to pull the black stuff out of the ground at these prices.

This is why our subject today Chevron (CVX) is in such a great position. It has one of the best balance sheets in the business. A culture of spending within their means saw their debt to equity ratio smaller than any other leading into 2020. Management has been well aware of how volatile the price of oil can be and how quickly it can fall, and its conservative governance has set them up perfectly to be able to take on further debt if it becomes necessary.

Chevron plans to cut capital spending by 20% for the rest of 2020, and cancel its buyback programme which will in all likelihood be banned by regulators anyway. CEO Michael Wirth has assured investors the generous 6.78% p.a. dividend is safe. “Our dividend is our number one priority and it’s very secure. We’re taking actions to preserve cash. It will have some impact on production in the near term, but we’ve stayed with our financial priorities, which include protecting the dividend.”

Of course, when talking of investing in oil companies we can’t ignore the elephant in the room – renewable energy. We all know that over the next few decades carbon-based energy sources will be slowly phased out and replaced with more ecologically friendly sources such as wind and solar. It will undoubtedly be better for the environment and soon be more cost-effective – if it isn’t already in some areas.

However, we are not looking to hold this stock for the next few decades. We only want to hold it until the oil price and the economy, and along with them the stock market, recovers. It might take 6 months, it might take a year or two. But it will certainly happen well before oil is made redundant. The transition to renewables, as important as it is, will take decades. There’s more than enough time for this stock to triple in price by then.

Speaking of the share price, we are looking at picking up an absolute bargain here. I’m sure you’ve all heard the saying – buy low and sell high. Well, oil companies don’t go any lower than when the economy is in recession and there us a glut of their product on the market. Just last week the stock price was well below 50% of its starting price in 2020. It is still down from $121 to $75.11 as of Friday.

With the Saudis and Russia looking to get together this week to try and negotiate a deal the oil price and the CVX share price is looking at a potential bounce. Both countries underestimated the scale of covid19 when they started this price war and both have found themselves vulnerable to the deteriorating global economy. We can expect a resolution in the near future so if you want to get on board you may need to hurry. Prices won’t be this low for much longer.