Chevron Corp. (CVX) is still posting a post-Santa Claus comeback.
Shares of the San Ramon, California-based energy leader are lurching higher from their bottom on Christmas Eve, fueled by a recovery in oil prices from some of its worst levels in years.
Shares were higher in pre-market trading after posting a small loss on Thursday, and lower than the broader market.
Macro Mover
The recovery in Chevron's stock has coincided with a recovery in U.S. crude oil prices, which have risen more than 13% from their bottom of the barrel price of $42.53 on Christmas Eve.
#TodayInEnergy - Crude #oil prices end the year lower than they began the year https://t.co/Z56hKBJIH6 #oilprices #WTI #Brent pic.twitter.com/lhl7cEBhxs
— EIA (@EIAgov) January 3, 2019
The recovery in global oil prices is aided by firmer production cuts from OPEC. Analysts are now anticipating a 1.2 million barrel per day production cut from the Saudi-led oil cartel. The cuts were supplemented by reports from the American Petroleum Institute Thursday that showed U.S. crude stockpiles fell by 4.5 million barrels in the week ending December 21, assuaging anxiety over U.S. manufacturing numbers.
OIL: +1.9% WTI is a good example of what we call a Counter @Hedgeye TREND bounce - they happen frequently in bear markets pic.twitter.com/Ep3hPSCtNy
— Keith McCullough (@KeithMcCullough) January 4, 2019
The move in oil prices is pivotal for Chevron in particular given its $50 per barrel basis point.
"Chevron remains a fan favorite among the integrateds for its medium term growth pipeline, strong balance sheet, modest buyback and business model being built around a $50/bbl environment," said RBC analyst Biraj Borkhtaria.
The oil industry standard high dividend payment doesn't hurt popularity with investors in a bearish market either. The dividend has historically held around a 4% yield.
"With the recently announced $3 billion annual share buyback and modest dividend growth, CVX should return >5% of its market cap to shareholders annually starting in 2019, above the US peer group average," JP Morgan analyst Phil Gresh pointed out as prices began to bottom in December.
Permian Priority
The $50 barrel bet jives well with the company's top priority in 2019: The Permian Basin.
The oil rich basin, which covers land from West Texas and New Mexico, is seen as a key to the company unlocking added shareholder value during the year due to its extensive infrastructure that allows lower cost production for oil giants like Chevron.
The company currently maintains about 2 million acres in the region with plans to pour expenditures into the Permian project from its global $20 billion capital expenditure plan.
"The company has a unique position in the Permian Basin, with over 11 billion barrels of resource, over half of which are expected to breakeven significantly below $50 barrels per day," Berenberg analyst Henry Tarr explained. "Production is targeted to grow to more than 600,000 barrels per day (from 200,000 in 2017) by 2022."
As the Dallas Fed slates WTI crude prices to mark just below $60 per barrel by year end, the increase in production this year at the lower price point could prove a strong buying thesis.
The problem with reliance on this region, and spend in the Permian Basin in particular, is that sustained performance of oil wells is far from certain as production bottlenecks prove problematic and could increase costs for companies like Chevron.
Growing Glut?
Additionally, major increases in production in any of the projects the company is undertaking would only serve to foment concerns over an oil glut that could keep oil price growth in check. That could temper expectations for broader oil price recovery.
The potential glut from ramped up production from U.S. producers coincides with concerns over Russia's production, which has hit its highest level since the collapse of the Soviet Union.
The surge in production comes despite Russia's minister of energy Alexander Novak agreeing to cut production alongside its Middle Eastern petroleum producing peers.
Discord from the OPEC cooperator could make the already volatile market more unpredictable.
On the demand side, concern is brewing over troubling manufacturing figures coming from demand driver China, weighing on oil's outlook for 2019.
Amid the current market, few stocks are certain bets and Chevron is no different.
The question of whether investors will dip into an oil stock like Chevron, or even a competitor like Exxon Mobil (XOM) essentially comes down to whether the dividend yield and nascent oil price recovery are enough to keep concerns over some uncertainties in the macroeconomic landscape and a lack of certainty over whether oil has truly bottomed.
For Jim Cramer's judgment on the matter, see here.
