Chevron (NYSE:CVX) The company’s shares have underperformed over the past year, rising just 2%. ExxonMobil (NYSE:XOM) It rose 8% during that period. shell (NYSE: SHEL) The stock is up about 17%. But if you’re looking at the energy sector, don’t ignore Chevron. In fact, its lackluster performance may make it the most attractive integrated energy stock you can buy today.
What is Chevron’s problem?
The word investors should be asking right now is probably “why”: Why is Chevron lagging other integrated companies? Energy companies By such a large margin? A big part of the answer is that Chevron recently closed an acquisition deal. Hess (NYSE: HES)But Hess has a partnership with Exxon on large capital investments in the oil industry, and Exxon is trying to block Chevron’s takeover by saying it can buy Hess out of that partnership.
If that were to happen, the Chevron acquisition would be less attractive and the deal could even be canceled. Another problem here is that determining who is right could cause significant delays and potentially costly legal battles. Investors generally don’t like uncertainty, so this uncertainty is casting a pall on Chevron’s stock price.
But it’s not all bad news. Chevron has a sizeable Dividend Yield Its closest competitor, Exxon, has a dividend yield of just 3.4%, while Chevron’s yield is 4.2%. Exxon has been increasing its dividend for 42 years, but it’s hard to argue with Chevron’s impressive 37-year record of annual dividend increases. Simply put, both companies are reliable dividend stocks.
Chevron is well prepared for adversity
That said, while Exxon is by no means financially weak, Chevron is currently in a better financial position than its closest competitors. Notably, Exxon’s debt-to-equity ratio is about 0.2x, while Chevron’s is about 0.15x. European peers are much more leveraged. Chevron has the strongest balance sheet of any integrated energy giant. Leverage is important because the energy sector is highly cyclical and prone to rapid price fluctuations.
Essentially, when oil prices fall, companies like Chevron tend to take on additional debt to fund their operations. In the case of Chevron and Exxon, that cash is used to support dividends. When oil prices rise, Chevron pays down its debt and prepares for the next industry downturn. The chart below shows this very clearly.
So if you buy Chevron today, you own the strongest company in the energy sector, financially speaking, and it offers a more attractive yield than its closest peer, Exxon. But there’s another factor to consider: the Hess deal. Even if Chevron doesn’t acquire Hess, the company has enough scale and financial strength to simply find another company to buy. In other words, the negative sentiment here is based mostly on short-term issues.
Don’t be afraid to buy the laggards in this industry
At the end of the day, Chevron is a well-run energy company with a strong financial base. Sure, there’s a lot of negative pressure on the stock right now, but it won’t last forever, and Chevron is well-equipped to address the issues. For investors who want to own energy stocks and are thinking long-term, Chevron is probably the best stock you can invest in with $1,000 (or more) right now.
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Reuben Greg Brewer The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a position in and recommends Chevron. The Motley Fool recommends the company. Disclosure Policy.
Best Energy Stocks to Invest $1,000 in Right Now Originally published on The Motley Fool
