Among the large companies in the oil and gas sector, Chevron (CVX, Financial) is a quality stock, and it can be considered for the dividend portfolio for the long term.
Chevron bottomed out at $70 on Aug. 25, 2015. The stock subsequently surged to $90 by Oct. 8, 2015. However, in the next three months, the stock remained sideways even as oil prices continued to record new lows.
The stock has bottomed out and is in a phase of consolidation. Investors can therefore consider exposure to the stock, which offers a robust dividend payout of $4.28 per share (4.7% dividend yield).
For the first nine months of 2015, Chevron generated $14.9 billion in cash flow and the company received $5.4 billion from asset sales. However, the company’s capital expenditure has been aggressive with $22.1 billion in investments for the first nine months of 2015.
As a result, the company had to issue $8.0 billion in debt, but that is not a concern as the company’s debt ratio as of 3Q15 remained low at 18.8%. The point is that Chevron is on track to generate approximately $19 billion to $20 billion in OCF; if oil prices remain subdued, investments within cash flow will still be aggressive. With debt to capitalization of 18.8%, leverage doesn't appear to be a worry.
One of the factors that has kept the company’s balance sheet healthy is continued asset sales with the company targeting asset sale of $15 billion for 2014-17. After having accomplished asset sales of $11 billion by September 2015, Chevron is now looking at an additional $5 billion to $10 billion in asset sales. This initiative will help the company invest in core initiatives with the company expecting strong production growth in 2016-17.
From a growth and stock upside perspective, the company’s Gorgon and Wheatstone projects should be the game changers. These are major capital projects, and LNG will be the key production growth driver for Chevron in 2016-17. The outlook for LNG is robust and these two projects should initiate further emphasis on the LNG segment. In the near term the following comment from the management provides positive guidance.
Under these assumptions we're anticipating a 13% to 15% increase in production from year-end 2015 to a range of between 2.9 million and 3 million barrels per day in 2017. In 2018 we expect volume growth momentum to continue largely because of project ramp-up schedules.
Therefore, production growth will be strong and Chevron expects capital investment of $25 billion to $30 billion for 2016. While capital expenditure is likely to moderate further in 2017, high investments should not pose a balance sheet threat. Chevron had cash and equivalents of $13.2 billion as of September 2015.
From a dividend perspective, an increase in dividends for 2016 is not expected. However, the current dividend payout of $4.28 per share will continue on the back of strong operating cash flows. If oil prices trend higher later in 2016 or in 2017, dividend increase is likely in 2017.
Overall, Chevron is moving in the right direction with robust LNG investments, strategic asset divestments and continued shareholder reward. Among oil and gas majors, Chevron is a good stock pick not only for 2016, but for the next three to five years. Gradual exposure to the stock is recommended as oil price volatility and weakness continue.
Disclosure: No positions in the stock
