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Chevron Has Much More Upside Ahead

The stock will gain more due to prospects for crude prices and key value metrics

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Oct 15, 2021
Summary
  • Light crude will rise even further.
  • Chevron is profitable again.
  • Value metrics are aligning well.
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Energy giant Chevron Corp. (

CVX, Financial) has performed excellently as of late due to rising oil prices. I'm still bullish on the stock for several reasons.

Crude prices

Crude prices are a long way from reaching the top. Apart from there being a reliance on oil as natural gas and other energy source reserves have thinned, oil's reserves are a long way from being adequately facilitated.

Associated gas crude reserves (a petroleum composite) are ticking up marginally with production increasing. But the problem persists: we're headed into seasonal demand for heating oil and reopening demand for jet fuel.

I personally don't see prices slowing down anytime soon, whether it's light, medium or heavy oil.

Chevron's fundamentals

Chevron has returned to profitability after a miserable 2020. The company's net income now stands at $3.58 billion versus a loss of $5.54 billion at this time last year.

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As a consequence of the recovery in income, Chevron's diluted earnings per share now trade at a desirable $1.87 versus a loss of $4 a year ago. The EPS is negatively correlated to the stock price, whereas it used to be positively correlated; I expect the value gap to be filled soon.

Chevron's enterprise value/sales and price-book ratios are trading below their sector averages by 30.78% and 13.13%.
If we had to set a fair value price target based on the stock's price-earnings multiple and its free cash flow, it could reach the $321 handle within the next 12 months.

However, this is realistically not possible due to the fact the stock pays out a large number of its earnings in dividends. Chevron has a dividend yield of 4.97%, with a payout ratio of 76.68%.

I'd rather opt for a handle of $150, identical to that recently set by Truist Financial (

TFC, Financial).

There's plenty of capacity remaining as the cash payout ratio is currently below its five-year average by 36.36%, while its net income margin is 18.34% above its five-year average.

Final word

Chevron's stock has justifiably done well recently, and I anticipate further gains along with the rise in oil prices. The company's earnings per share and stock price value gap also means it has much to gain before investors should cash out their profits.

Disclosures

I am/we are Long CVX
The views of this author are solely their own opinion and are not endorsed or guaranteed by GuruFocus.com
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