Global energy behemoth Chevron (NYSE: CVX) announced fiscal 2019 fourth quarter results that MET expectations.
Revenue came in at $36.35 billion, 8% below the consensus estimate of $39.59 billion. The figure marked a 14% decrease over the same period a year ago when revenues were $42.35 billion.
Adjusted earnings per share of $1.49 matched the consensus estimate. Earnings were 24% lower than the $1.95 recorded in the fourth quarter of 2018.
Full-year earnings per share of $6.27 were down 22% in 2019 over 2018’s $8.07.
Market sentiment towards the energy sector has soured as oil and natural gas prices have fallen. This is related to a supply glut of both commodities along with worries about slower demand from China due to the coronavirus epidemic. China is the world’s second biggest oil consumer after the U.S.
However, the downturn in the energy sector may ultimately create entry opportunities for some of the more stable oil and gas companies.
RECORD PRODUCTION AMID LOWER OIL PRICES
Chevron’s largest segment, International Upstream, posted a 17% drop in earnings. U.S. Upstream contributed to the profit decline with a 28% slide. Aside from lower oil and gas prices, earnings were negatively impacted by impairment charges associated with the Appalachia shale, Big Foot, and Kitimat LNG projects.
International Downstream earnings were more than halved while U.S. Downstream was the lone bright spot with a 90% earnings increase.
There doesn’t appear to be any near-term relief in sight for oil and gas prices. There is ample supply of both and slowing economic growth threatens future demand.
But despite the low prices Chevron had record crude production of more than 3 million barrels per day in 2019.
At the same it is spending more on capital projects. Capital expenditures increased 4% in the fourth quarter.
CASH FLOW DECLINES, DIVIDEND CLIMBS
Earlier this week Chevron increased its dividend by more than 8%. The dividend aristocrat has raised its annual shareholder payout for 33 straight years. The current dividend yield of 4.7% is more than double the industry average.
It is a concern, however, that Chevron continues to raise its dividend despite the current operating conditions. Cash flow from operations fell 11% in 2019 over 2018. Cash flow growth has been rather anemic and doesn’t appear to be improving anytime soon.
The company has also been active on the share buyback front. Bulls consider this to be adding shareholder value. Bearish investors view the move as indicative of a lack of growth projects in the pipeline.
WILL ENERGY STOCKS STAGE A COMEBACK?
Investing in energy stocks has not been a good bet since the start of the bull market over a decade ago.
CVX stock is already down 8% this year while the industry is down 6%. Exxon Mobil, which reported similarly weak fourth quarter results, is down 7% year-to-date. This compares to a flat year-to-date return in the S&P 500 index.
Despite disappointing numbers of late, Chevron’s stock may be undervalued. It trades around 15x forward earnings compared to its three year historical average of 18x.
The stocks are inexpensive but perhaps for good reason. There will need to be an improvement in commodity pricing or a sustainable growth catalyst to spark a revival.
Chevron has been a better choice within a bad group. Its massive size, liquidity, and inexpensive valuation make it a relatively safe play for income investors. Investors interested in stronger growth would be better suited looking at the technology sector.
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