It's been an unusual year for the oil exploration and production (E&P) sector. Significant players like Chevron(NYSE: CVX), Occidental Petroleum, ExxonMobil, and Devon Energy have notably underperformed the S&P 500 index.
Given the economy and the current state of the industry, it's fair that they continue to be out of favor with investors. And yet, many analysts remain positive about the sector. A Piper Sandler analyst recently maintained an overweight rating on Chevron's stock, even while cutting the price target to $180 from $188. That still implies a 15% upside over the next 12 months from the current price.
The bull case for Chevron
Piper Sandler's argument repeats the fundamental case for oil majors. With the price of oil still above $80 a barrel -- an excellent result in a slowing economy -- Chevron will continue to generate excellent cash flows. Indeed, the Wall Street consensus has Chevron generating $22.9 billion in free cash flow in 2024. Putting that figure into context, it represents 7.9% of Chevron's $289 billion market cap.
The cash flow supports its $6.52 per share annual dividend (currently yielding 4.2%) and enables reserve-enhancing acquisitions, such as Chevron's agreement to acquire Hess and ExxonMobil's interest in the matter. If the market isn't willing to properly value oil E&P companies, then there's an opportunity for majors to acquire assets at reasonable prices.
That should improve the quality of its upstream assets, enabling Chevron to continue generating cash flow from oil volumes. On a negative note, Piper Sandler notes that Chevron's resources currently differ in quality.
Chevron is well-positioned in the current environment
In addition, oil majors have been a lot more disciplined in expanding production than in the 2010-2015 period, when the price of oil rose after the financial crisis. As such, Chevron'ss rock-solid balance sheet (net debt stood at just $12.6 billion at the end of 2023) means it's an ideal stock to buy if you are bullish on the long-term outlook for the price of oil.
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Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
