Source: PaxForex Premium Analytics Portal, Fundamental Insight
The energy sector experiences considerable fluctuations in oil and natural gas prices, leading to periods of prosperity and downturns. Investing in this sector can be challenging due to its inherent volatility. However, Chevron has devised a strategy to navigate through these market peaks and valleys while providing consistent returns to investors through a reliable stream of dividends.
For those currently exploring opportunities in energy stocks, the appeal of this integrated energy giant is evident. Here's why.
While some companies cater to more risk-tolerant investors, exemplified by Devon Energy with its variable dividend policy, Chevron takes a different approach. Unlike Devon Energy, which ties its dividend to the unpredictable shifts in oil and natural gas prices, Chevron positions itself at the opposite end of the spectrum. This integrated energy company aims to offer stability and reliability, making it a more suitable choice for conservative investors prioritizing income.
Chevron has demonstrated a remarkable commitment to its investors by consistently increasing its dividend for 36 consecutive years, even in the face of the rapid and substantial price fluctuations in the commodities it produces. While a significant decline in oil prices impacts both the top and bottom lines of Chevron, akin to its counterparts like Devon Energy, Chevron distinguishes itself with a steadfast focus on delivering reliable dividends. This commitment stems from a distinct business model.
Crucially, Chevron operates as an integrated energy company, involved not only in oil and natural gas production but also in ownership of crucial assets such as pipelines and facilities for fuel processing (chemicals and refining). Each segment operates with distinct dynamics, allowing Chevron to navigate market challenges effectively. For instance, while refining benefits from lower oil prices, pipelines offer consistent cash flows irrespective of commodity price fluctuations. Although production assets remain pivotal for Chevron, this diversification helps mitigate the impact of the energy industry's inherent volatility.
Another pivotal aspect favoring Chevron is its robust balance sheet, with an exceptionally low debt-to-equity ratio of 0.12. This figure stands as the lowest among its closest peers and notably contrasts with Devon Energy's ratio of around 0.50. Chevron's financial resilience provides it with the flexibility needed to endure challenging periods, reinforcing its ability to weather industry downturns.
What stands out about Chevron's current debt-to-equity ratio of 0.12 is its marked decrease, primarily attributed to the post-coronavirus oil price rally, allowing the company to efficiently retire its debt. However, amid the public health crisis, Chevron experienced a substantial increase in leverage, nearly doubling from around 0.2 times to approximately 0.35 times within a year. This surge during challenging times was swiftly addressed as oil prices rebounded, leading to robust profits, enabling Chevron to deleverage strategically.
This proactive approach positions the energy giant for future downturns, acknowledging the cyclical nature of the industry. Chevron deliberately incurs debt in challenging periods, ensuring continued business funding and dividend support, with confidence that subsequent upswings will facilitate the restoration of its balance sheet.
For conservative dividend investors seeking exposure to the energy sector, Chevron emerges as one of the most prudent choices. The current 4.1% dividend yield adds to its appeal, especially considering the meager 1.4% yield of the S&P 500 index. Despite potential stock price volatility inherent in the energy sector, Chevron proves to be an attractive option, particularly during market downturns when its yield can surpass current levels. Building a diversified income portfolio that guarantees a reliable income stream becomes more compelling with Chevron, given its commitment to providing investors with a consistent and growing stream of dividends.
As long as the price is above 145.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 147.22
- Take Profit 1: 152.00
- Take Profit 2: 156.00
Alternative scenario:
If the level of 145.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 145.00
- Take Profit 1: 143.00
- Take Profit 2: 140.00
