Chevron Corporation: Why CVX Stock Fell Today
January 30, 2017
Chevron Corporation (NYSE:CVX) stock has had a solid run over the past year, climbing more than 35%, despite worrisome cash flow issues and continued weakness in oil prices. The reason? Well, it’s always difficult to read the mind of “Mr. Market,” but my guess is that the excitement over the company’s LNG projects and management’s willingness to maintain (and even increase) the dividend have been CVX stock’s big drivers of late. That’s usually not the best formula for sustained gains.
Well, investors might finally be starting to sober up. CVX stock is down about 2.5% in midday Friday trading after posting highly disappointing fourth-quarter results.
Is this the beginning of a prolonged pullback for the shares, or is it simply a small hiccup worth pouncing on? Let’s take a closer look.
Big Oil, Big Miss
For the quarter, Chevron posted fourth-quarter earnings per share of $0.22, widely missing the average analyst estimate by $0.42. Revenue increased 7.7% over the year-ago period to $31.5 billion, also clearly below the consensus of $33.8 billion. Yuck.
What was the problem? Well, in addition to the obvious softness in oil prices, management cited lower refining margins and outsized tax charges for the disappointing quarter. The company continues to look for ways to cut costs, but said its large-scale layoffs are pretty much over and done with.
“Our 2016 earnings reflect the low oil and gas prices we saw during the year,” said Chevron Chairman and Chief Executive Offier John Watson. “We responded aggressively to those conditions, cutting capital and operating expenses by $14 billion. We are well positioned to improve earnings and be cash flow balanced in 2017 through continued tight spending and cost control and additional revenue from expected production growth.” (Source: “Chevron Reports Fourth Quarter Net Income of $415 Million,” Chevron Corporation, January 27, 2017.)
Of course, as income-seeking investors, cash flow is what we really need to be focusing on, especially when it comes to Chevron.
Cash Getting Crunched
As I touched on earlier, the company has been grappling with cash flow issues as management tries to maintain spending and keep increasing its dividend even amid the harsh environment.
Here, the news also isn’t great; Chevron’s full-year 2016 cash flow came in at $12.8 billion, down significantly from $19.5 billion in 2015.
Nevertheless, management remained confident in its ability to cover spending and dividends in 2017 with operating cash flow, suggesting that Chevron will continue to focus on projects with shorter life cycles. 2017 marks the fourth consecutive year in which Chevron has cut capex, so management is clearly doing everything in its power to keep the streak of 29 years of annual dividend hikes alive.
If the company can get any help from higher energy prices, it would also go long way in giving us dividend investors some comfort.
LNG Is the Place to Be
To be sure, the attraction of CVX stock isn’t only limited to its consistently growing dividend. There’s definitely some appreciation appeal there, driven largely by the company’s key LNG developments.
Most significant to Chevron is the company’s Gorgon LNG project, which experienced a prolonged shutdown at the end of 2016. Luckily for investors, however, Gorgon is now back at full production, with the next phase of processing scheduled for early in Q2 2017.
The Bottom Line on CVX Stock
Even after Friday’s pullback in CVX stock, I’d remain a bit cautious. The stock is still up more than 40% from its 52-week lows and continues to trade at a forward price-to-earnings ratio of around 20, which seems to leave little room for error. And while management’s dedication to dividend increases is commendable, the payout might be cramping the company’s long-term growth and financial health.
Chevron’s growth projects, industry-leading margins, and shareholder-friendly management are certainly worth investing in, but I’ll hold out for a wider margin of safety (to account for the risks) before doing so.
