The Dow’s One Big Winner Continues to Run

If the Dow Jones Industrial Average was a horse race, Chevron Corp. (NYSE: CVX) would be in front by about three and a half lengths. 

The integrated oil and gas major has sprinted 46% higher in 2022, leaving its Dow peers in the dust. Insurance group The Travelers Companies is a distant second up 11% followed by a half dozen names that are up single digits. The index’s remaining 22 constituents are in the red, most by double digit percentages.

The field of mostly sluggish mares has dragged the Dow down 9% year-to-date with the impacts of the Russia-Ukraine conflict and inflation weighing heavily. Not surprisingly, Chevron, the benchmark’s only energy stock, is benefitting from these same headwinds. 

After a year in which it finished up 39%, surging oil prices and geopolitical uncertainty has Chevron all but locked in as the Dow’s 2022 ‘Best in Show”. Will it continue to sprint away from the competition?

Why is Chevron Stock Up?

Chevron’s long rally from its pandemic low reached another gear after Russia invaded Ukraine. The stock has climbed from roughly $130 to $170 over the last three weeks and finished in the green in 10 of the last 11 trading sessions. On Thursday, it reached an all-time intraday high of $174.76 just 24 months removed from trading in the $50’s. 

Most of the early leg work was done by the global economic recovery. As demand came back online and supplies were limited, WTI crude oil futures rebounded from negative territory to around $72 by the end of last year.

The recent spike in oil prices is all about Russia-Ukraine. As the world’s third largest oil producer after the U.S. and Saudi Arabia, Russia is responsible for approximately 10% of global oil supply. So with refineries and traders now refusing to purchase Russian oil, WTI crude prices have screamed past $100 for the first time since 2014.

Chevron’s share price has mimicked oil’s recent run. With some of the lowest operating costs in the industry, the company is expected to get a major boost in profits. Although its transportation and labor costs are also up, they will be more than offset by realized selling prices. 

How Much Money Will Chevron Make This Year?

Analysts have been upwardly revising Chevron’s earnings per share (EPS) estimates in conjunction with the sharp rise in oil prices. The current consensus EPS forecast for 2022 is $11.40 and likely to move higher. 

With 1.93 billion shares outstanding this equates to a staggering $22 billion in profits expected this year. To put this reversal of fortunes in perspective, Chevron recorded a $5.5 billion net loss in 2020 before turning in a $15.6 billion profit last year.

Wall Street’s earnings forecast for this year implies 40% year-over-year growth. And with the Russia-Ukraine war entering its third week, crude prices (and Chevron’s earnings potential) may have not even reached their peaks. 

Is it Too Late to Buy Chevron Stock?

Chevron is trading at 21x trailing earnings and 15x forward earnings. These multiples are a far cry from the bargain levels seen a year ago but remain well below historical averages. Over the last five years Chevron’s trailing P/E has averaged 30x, so there is still a long road ahead for a potential revision to the mean. The stock is also attractively valued considering investors only need to pay 15x for a company poised to deliver 40%-plus bottom line growth this year. 

Since Chevron’s stock has more than tripled over the past two years, paying a premium price of $170 may make investors cringe as if they were paying for premium gasoline prices. But with oil prices likely to trend higher even after a Russia-Ukraine resolution, the quarterly results ahead make it worth it.

Chevron is not the deep value stock it was during the early months of the pandemic but it does still offer value. Despite the recent rise, the stock comes with a 3.3% dividend yield and P/E ratio that is below that of the broader U.S. equity market. It is a dividend that is likely to increase as it has for 34 years straight as Chevron continues to be a cash generating machine for the foreseeable future.