Should a Lack of Windfall Profits Keep You Out on Chevron Stock?

Key Points

• The headline number of Chevron’s earnings report is the bottom line which was 47% lower than the “windfall profits” the company earned in 2022. 
• This reflects a normalizaiton of oil prices which won’t be a threat to Chevron’s disciplined business model. 
• With oil prices likely to rise in the second half, CVX stock is likely forming a bottom; that’s supported by analysts who still give the stock a 20% upside.  

You won’t be hearing any complaints about “windfall profits” after the latest earnings report from Chevron Corporation NYSE: CVX. The company delivered a mixed earnings report with the headline number being its quarterly earnings of $3.08 per share. This number missed analysts’ expectations by 11 cents. The number was also 47% lower on a year-over-year basis.  

Undoubtedly, those profit numbers will be music to the ears of those who want to see the end of oil. But the numbers simply reflect a supply-demand situation that is returning to normal.  

That shouldn’t be too worrisome for Chevron investors. The company’s break-even oil price was around $47 at the end of 2022. That reflects the fact that Chevron along with many of the other big oil companies have become leaner and more efficient.  

But even if oil prices don’t rise to the level that analysts expect, nobody is forecasting oil to drop into even the $50 range anytime soon. That means that investors can appropriately focus on what the report said about the state of Chevron’s business.  

A Fundamentally Sound Company 

Overall, there was still a lot in the report to satisfy Chevron shareholders. Here are some of the highlights: 

• Chevron’s crude oil and natural gas production rose 2.2% year-over-year. And much of that volume is coming from the coveted Permian basin.  
• The company recorded $6.3 billion in cash flow from operations. That was over 50% lower on a year-over-year basis. However, it was still 9% higher than expectations. Plus, the company generated quarterly free cash flow (FCF) of $2.5 billion.  
• As of June 30, Chevron had $9.3 billion in cash and cash equivalents with a very manageable debt load of $21.5 billion.

This reflects the company’s business model which prioritizes shareholder value by maintaining a strong balance sheet to survive during market downturns, make strategic acquisitions without overextending, and by consistently buying back shares and not only paying, but raising its dividend, which it has done for the last 37 years.  

Plus, the company continues to take a measure twice, cut once approach to renewable energy. While that means it’s not moving as fast as its competitors, it’s a strategy that has served the company and its shareholders well.  

What to Do with CVX Stock? 

When it comes to oil stocks, particularly big oil stocks, earnings reports are lagging indicators. That is, they may confirm something you already knew, but they aren’t the best predictor of future performance. And they are rarely that surprising.  

That was the case with this report. Oil demand has been down in 2023 for many reasons. And oil prices have been in the $70-dollar range for much of the year. Oil companies were due for a correction, and Chevron’s results reflect that.  

Is the bottom in? On several occasions in the last 12 months, a price of around $151 has been a firm level of support for CVX stock. That was when the price of crude was much lower than it is at this time. And with oil prices likely to rise in the second half of 2023, it’s fair for investors to think the worst may be priced into the stock.  

The Chevron analyst ratings on MarketBeat have the stock as a Moderate Buy with a price target of $190.16. Tellingly perhaps, Morgan Stanley NYSE: MS reiterated its Equal Weight rating on July 25 with a price target of $197.