Oil and gas investors have had a rough go of it recently, as electricity has become the worst-performing industry, decreasing 45% against their 59% rise of the S&P 500 within the previous five decades.
Oil and gasoline is a tricky business to put money into, however like most businesses, there are winners for those who know where to look. This is why I am choosing Chevron (NYSE: CVX) as my very best petroleum stock to purchase at this time and hold during the upcoming several decades.
Picture source: Getty Images.
Industry-leading balance sheet
It would be difficult to discover an integrated oil and gas firm with a much better balance sheet compared to Chevron. Fool contributor Reuben Gregg Brewer considers that Chevron’s balance sheet makes it a premier oil stock — particularly in this marketplace.
Though Chevron took on greater debt this year in a bid to maintain its liquidity large, the firm sports a remarkable AA credit rating, meaning that it could tap in the debt market for an attractive rate of interest. Its reduced debt-to-capital and debt-to-equity ratios imply it’s ample ability to boost debt if necessary.
Oil Industry Balance Sheet Comparison, information by YCharts.
Chevron leads all its rivals in both of these key financial metrics: some thing to note in this hard energy marketplace.
Resilience in the face of low oil Rates
Despite arguably the best balance sheet in the company, Chevron nevertheless is dependent upon the price of petroleum.
After briefly going negative on April 20, West Texas Intermediate (WTI) oil prices have appreciated a steady rally and invested all of June and July over $35 per barrel. In July, costs were rather steady, hovering right around $40. WTI oil sits at just over $42 in the time of the writing.
Chevron management was eager to deal with the concern of oil prices throughout the organization’s second-quarter earnings telephone. Chevron CFO Pierre R. Breber noted that Chevron “may have two decades in $30 Brent [and continue to] invest in the company, sustain our earnings, and exit … 2021 using a net debt ratio significantly less than 25%, which we believe is still an extremely strong balance sheet.” Chevron finished the second quarter with a net debt ratio of 14%.
A hearty dividend
Speaking of its dividend, Chevron and US. competitor ExxonMobil are the only two energy companies that hold the coveted status of Dividend Aristocrat, a designation given to any company in the S&P 500 that has increased its base own dividend for at least 25 consecutive years. Chevron has increased its dividend for an impressive 32 consecutive years. And in the last 10 years, it has increased its dividend by 79%.
Management is intent on cutting spending and ensuring ample liquidity so that Chevron remains a premier dividend stock. In fact, Chevron’s Q2 capital expenditures came in 40% below its quarterly budget. The company now expects full-year capex to be just $14 billion, which is significantly lower than its initial guidance of $20 billion.
Even with that spending cut, Chevron has shown time and time again that it has the patience to back out of a bad deal and strike when the time is right. That discipline was recently put on display, as Chevron announced plans to acquire Noble Energy (NASDAQ: NBL) for $5 billion in stock and the assumption of $8 billion in debt.
Like its attempt to purchase Anadarko last year, Chevron’s Noble Energy play is intended to enhance its production capabilities in the Permian Basin, the largest onshore oil field in the U.S. But unlike the costly price the company would have paid for Anadarko, this deal looks like a much better value for Chevron.
For starters, Chevron paid only a 12% premium for Noble Energy, offering Noble investors 0.1191 Chevron shares in exchange for each Noble share. For comparison, Chevron’s bid for Anadarko came at a 37% premium. Although Chevron has reduced its Permian capital expenditures by 75% compared to the first quarter of 2020, the region remains one of Chevron’s primary growth drivers. It may take time for the acquisition to pay off, but getting a good price for Noble during a weak market is a testament to the value of Chevron’s balance sheet strength.
The best way to invest in oil
Chevon’s balance sheet, ability to handle lower oil prices, dividend strength and yield, and savvy deal-making would be four excellent reasons why the company is a great way to invest in oil and gas. The timing could be good too, as its shares are down 28% year to date and yield 5.9% at the time of this writing.
As with other oil and gas companies, there is a significant amount of risk that comes with the territory of investing in the industry. Chevron remains in “prove it” mode, having underperformed the market for several years. There’s no harm in waiting until Chevron and the rest of the electricity sector prove they can compete with the broader market, but at the very least I would recommend adding Chevron to your watch list or picking up an introductory position now.
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Daniel Foelber owns shares of Royal Dutch Shell (A Shares). The Motley Fool has no position at any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and then opinions expressed herein are those perspectives and opinions of the author and don’t necessarily reflect those of Nasdaq, Inc.