The energy sector took a big hit due to the COVID-19 pandemic. However, the world is crawling back to normalcy, even with concerns over the Delta variant persisting.
A breakout on the upside seems imminent for CVX. I am bullish on the stock.
Besides the upside potential, Chevron also has an annualized dividend of $5.36. This translates into an attractive yield of 5.43%.
Positive Outlook for Oil
According to the International Monetary Fund, the global economy is projected to grow at 6% in 2021 and 4.9% in 2022. This is likely to ensure steady upside for oil.
It’s also worth noting that in July 2021, OPEC and allies agreed on a gradual increase in production. The target is to end production cuts by September 2022. Even with this news, oil has remained firm. This is a clear indication of steady growth in global demand.
Another factor that’s likely to support upside in energy prices is expansionary monetary policies. With real interest rates remaining negative in most parts of the world, asset classes like precious metals, energy and commodities are likely to trend higher.
Overall, the trend for oil is bullish, and Chevron stock has ample positive catalysts.
Performance Despite Low Prices
Last year was rough in terms of average oil price. Brent averaged $41.70 per barrel, compared to $64.30 in 2019. Even with these oil prices, Chevron delivered operating cash flows of $10.6 billion.
For the current year, the U.S. Energy Information Administration expects oil price to average $68.70 per barrel. Furthermore, the estimate for 2022 is $66.
With this outlook, the company is likely to be a cash flow machine. It’s also worth noting that the company had proved reserves of 1.1 billion barrels as of 2020.
Healthy Balance Sheet
Chevron reported cash and equivalents of $7.5 billion at the end of Q2. This provides ample financial headroom to invest in exploration projects.
Also, for the first half of 2021, Chevron reported $11.2 billion in cash flow from operations.
Clearly, the company is well positioned to maintain dividends and pursue share repurchases.
Wall Street’s Take
According to TipRanks’ analyst consensus rating, CVX stock comes in as a Moderate Buy, with 10 Buys, and four Holds assigned in the past three months.
The average Chevron price target is $127.92 per share, implying 31% upside potential from current levels.
Chevron stock seems to be in a phase of consolidation. Considering the asset base and balance sheet profile, the stock is well-positioned to trend higher.
In terms of risks, there might be a scenario for an economic slowdown due to the Delta variant. However, even if oil trades at around $60 per barrel, Chevron is positioned to generate healthy free cash flows.
Overall, CVX stock seems to be worth holding in the portfolio for upside, as well as for regular dividend income.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article
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