Why Analysts Are Divided on Chevron Stock

Chevron (CVX) stock’s performance has been dull this quarter. The company is facing a weaker oil price environment. Although oil prices have risen this year, on average, they still stand lower than last year. Plus, next year, markets could face an oil supply glut. To remove extra barrels of oil from the market, OPEC and allies have decided to deepen production cuts.

Analysts’ ratings for Chevron

Wall Street analysts seem divided on Chevron stock. Of the 25 analysts that cover Chevron, 17 (or 68%) rate it as a “buy” or “strong buy.” The remaining eight suggest “hold.” Their mean price target for Chevron stock stands at $136, reflecting a 15% upside potential.

Notably, analysts’ “buy” ratings for Chevron have declined in the past year. Meanwhile, their “hold” ratings have risen. The change in analyst ratings shows a shift in their sentiment. While most of them were positive on Chevron earlier, many have now adopted a wait-and-watch approach. This shift could be due to the changing energy environment. Let’s dive deeper into understating the volatile business conditions.

Chevron prepping for weaker energy prices

Chevron is getting prepared for lower commodity prices. The company expects weaker crude oil and natural gas prices in the long term. Therefore, it is focusing on getting profitable in any business environment, concentrating on achieving sustainable profits.

Chevron plans to achieve sustainable profits by investing in high-return, short-cycle projects, and selling non-core projects. Recently, Chevron announced its capex guidance for 2020. It expects its capex to be flat at $20 billion next year.

In the upstream segment, the company plans to divest projects that might not be competitive in a lower oil price scenario. Chevron has recorded high growth in its upstream volumes until now, but could see weak growth going forward. In its downstream segment, the company is focusing on value-creating assets that are beneficial in the changing regulatory environment. To learn more, read Can Chevron Churn Profits across the Oil Price Cycle?

Financial strength

In a business environment filled with uncertainty, Chevron has held onto its financial strength. It has the best debt position in the integrated energy sector. The company’s total-debt-to-capital ratio stands at 17.3%, the lowest among oil stocks. Peers ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and BP (BP) have debt ratios of 19.4%, 31.6%, and 43.0%, respectively.

Lower debt gives Chevron the strength to sail through rough waters. In harsh business conditions, it can quickly raise debt to fund its short-term or long-term needs. Additionally, investors and rating agencies won’t be worried by low debt.

Furthermore, the company has a comfortable cash flow position. In this year’s first nine months, Chevron’s cash flow from operations covered its capex and dividend payments. It’s in a better position than peers ExxonMobil and BP, which have fallen short in covering these expenses. To learn more, read BP versus Chevron: Who Has More Financial Power?

Overall

Analysts are divided on CVX stock. This division may be due to the company’s financial strength and flexibility amid tough business conditions. Chevron has the strength to withstand and grow through the oil price cycle. However, analysts are waiting to see concrete results in terms of earnings growth. Plus, they’re waiting to see how next year shapes up. As of now, analysts expect Chevron’s earnings to rise by 8% in 2020, the least among peers. It’s no surprise that many analysts have adopted a wait-and-watch approach.