Chevron’s Stock Struggles Amid Acquisition Uncertainty

Chevron Corporation (NYSE: CVX) has seen its stock rise by 10% over the past year, trading at approximately $156 per share as of December 11. Despite this increase, Chevron’s performance is lagging behind both the S&P 500, which has gained about 31%, and peer Exxon Mobil (NYSE: XOM), whose stock is up 14%. What’s behind this disparity?

Investor Concerns Surrounding Acquisition

The relative underperformance of Chevron’s stock can be attributed to worries about its planned $53 billion acquisition of Hess. This acquisition is strategically sound, as Chevron would gain access to 465,000 acres in the Bakken Shale while increasing its already significant oil-equivalent production from Guyana. However, uncertainty about the deal is causing investors to hesitate. The acquisition adds specific risk to Chevron’s stock performance. For those seeking a steadier investment, the High Quality portfolio, which has outperform the S&P 500 with returns exceeding 91% since inception, may be an appealing alternative.

Possible Complications with Hess

A complication for Chevron’s acquisition is its connection to Exxon, which is a partner with Hess on a significant energy project in Guyana. Exxon claims it has the right to buy out Hess if it sells itself to Chevron, creating potential complications for the acquisition. This uncertainty continues to weigh on CVX shares, with market doubts swirling around such a substantial purchase. While the Federal Trade Commission has cleared the acquisition, it has prevented John Hess from joining Chevron’s board.

Volatility in Chevron’s Stock Performance

The past three years have shown inconsistent stock performance for Chevron, with annual returns fluctuating widely compared to the S&P 500. For instance, returns were 46% in 2021, 58% in 2022, and fell to -14% in 2023. By contrast, the Trefis High Quality (HQ) Portfolio, which includes a selection of 30 stocks, has delivered less risk and better returns than the S&P 500 over the same period. Given the current macroeconomic climate, driven by interest rate fluctuations and ongoing global conflicts, Chevron may face challenges similar to those of 2023, potentially leading to further underperformance against the S&P in the coming year.

Current Oil Market Overview

As of writing, Brent crude oil prices stand around $74 per barrel. OPEC+ has decided to extend production cuts, yet global oil markets are still under pressure due to decreasing demand from China and increased supplies from the U.S. Add to that the backdrop of rising geopolitical tensions, and demand perspectives for oil remain uncertain. Oil has remained in a narrow trading range this year, fluctuating between $69 and $91 per barrel, amid fears that supply may outpace demand. Although Chevron has a diversified portfolio within the energy value chain, its financial performance is heavily influenced by oil prices. Fortunately, the recent uptick in crude oil prices, fostered by signs of potential stimulus from Chinese authorities, bodes well for Chevron. Even in lower price environments, Chevron remains one of the lowest-cost producers and relies more on midstream and downstream operations than drilling for revenue.

Q3 Financial Snapshot

In the third quarter, Chevron reported net income of $4.49 billion, or $2.48 per share, reflecting a 31% drop from the $6.53 billion, or $3.48 per share, recorded in the same period last year. After adjusting for foreign currency effects, earnings came in at $2.51 per share, exceeding analyst expectations. The year-over-year decline in profits was mainly due to lower margins on refined product sales, decreased crude oil prices, and the absence of favorable tax benefits. With revenues totaling $50.67 billion, Chevron beat market expectations but experienced a 6% decline year-over-year. Notably, Chevron achieved a production rate of 3.36 million oil-equivalent barrels per day in Q3, an increase of 7% year-over-year, propelled by record output from the Permian Basin and the acquisition of PDC Energy. However, U.S. natural gas realization fell sharply by 60% year-over-year, while international realization experienced a 7% growth in Q3.

Future Outlook

Looking ahead, we estimate Chevron’s revenues to be around $196 billion for fiscal year 2024, maintaining similar levels to the previous year. For its earnings per share (EPS), we project a figure of $10.41. Following adjustments to our revenue and earnings forecasts, we have updated Chevron’s valuation to $161 per share based on the expected EPS and a P/E multiple of 15.5x for fiscal 2024, which represents a 3% increase over its current market price. It’s important to note that our revenue estimates focus on core sales originating from hydrocarbons, excluding additional income from distribution, processing, and marketing services.

Cost Control and Asset Management

Chevron is positioning itself strategically by streamlining its portfolio, with planned asset sales in Canada, Congo, and Alaska expected to finalize in the fourth quarter of 2024. The company is also targeting reductions in costs ranging from $2 billion to $3 billion between 2024 and the end of 2026.

Comparative Performance with Peers

To better understand Chevron’s standing, it’s beneficial to examine its performance compared to its peers. Comparative metrics are available for broader insights across various industries.

[1] Returns as of 12/12/2024
[2] Cumulative total returns since the end of 2016

Explore Trefis Market-Beating Portfolios

Discover all Trefis Price Estimates

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.