Zach Jonson, senior portfolio money manager at Stack Financial Management, selected Chevron (GE) as his top investment idea for 2019. The stock has since risen 15%. Here's his update on the large cap energy firm.
Entering 2019, we believed it was important to focus on well-managed companies as the energy landscape remained relatively tenuous.
Chevron fit this description perfectly due to their high-quality asset base and strong balance sheet. As oil prices have rebounded from depressed levels, CVX has produced solid returns through the first half of the year and, in our opinion, continues to offer an attractive combination of value and safety moving forward.
Chevron is one of the world’s largest integrated energy companies with exploration, production, and refining operations that span the globe. The company has its hands in all aspects of the energy life cycle including upstream, midstream, and downstream/chemical operations, which gives them the ability to navigate the ever-changing commodity environment.
In April of 2019, CVX looked to expand upon their strong asset base by offering to purchase Anadarko Petroleum (APC) for $33 billion.
However, Occidental Petroleum (OXY) produced a counter bid of $38 billion that was ultimately chosen by company shareholders. While Chevron would have benefitted from the addition of APC’s portfolio, management chose to maintain fiscal discipline and walk away from a bidding war.
Fortunately, CVX received a $1 billion break-up fee that will ultimately be distributed to shareholders or utilized for future growth opportunities. More importantly, management’s refusal to overpay for APC’s assets further validates the “New Chevron’s” operating discipline.
Going forward, Chevron continues to remain on track to produce multiple years of positive Free Cash Flow as they benefit from an increase in the price of oil and the completion of major capital projects.
In spite of double digit returns to start the year valuations remain attractive, as Chevron trades at a forward based FCF Yield in excess of 7%. Additionally, management remains focused on providing superior cash returns to shareholders as highlighted by a 3.8% dividend yield.
While we anticipate oil price volatility to continue, Chevron has positioned itself to participate when oil prices move upward but also insulate losses during the tough times.
This combination of upside leverage and downside resilience provides the exact type of value and safety that we believe is imperative in the current market environment. (Disclosure: Clients and individuals associated with Stack Financial Management hold positions in, and may from time to time make purchases or sales of, this security.)
