Chevron (CVX 2.16%) is the biggest loser in the integrated energy sector over the past year, with its share price performance lagging behind even long-troubled BP (BP 6.38%). Chevron's stock return since June 2023 trails leader Shell (SHEL 3.98%) by well over 15 percentage points. But that underperformance may make Chevron the best choice among the group for new energy sector-interested investors.
Here's what you need to know and why the next year could be very important to changing the negative sentiment around Chevron's stock.
Chevron isn't faring well on Wall Street
Stocks go in and out of favor all of the time. Chevron is currently in the dog house when it comes to the energy sector's largest and most dominant companies -- namely, the integrated energy giants. The performance highlighted above is a clear indication of that. For additional evidence of this trend, look no further than ExxonMobil (XOM 3.65%), Chevron's closest U.S. peer. ExxonMobil has seen its stock price rise nearly 10% over the past year compared to the roughly 2% gain Chevron has posted.
The problem is that nothing has really gone terribly wrong at Chevron from an operational perspective. It is still a conservatively financed oil company with a fairly strong financial foundation and business model. Furthermore, its debt-to-equity ratio remains the lowest among its close peers. That gives Chevron ample flexibility to handle the energy industry's inherent volatility. But the company isn't getting as much credit for this fact today as it seemed to during the early days of the coronavirus pandemic.
The price of West Texas Intermediate (WTI) crude fell below zero back then after energy demand was disrupted by the economic closures used to slow the spread of COVID-19. Investors shifted toward quality. Now energy prices have recovered, and Chevron's strong finances have taken a back seat to other issues.
NYSE: CVX
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What the next year holds for Chevron
One of the biggest issues facing Chevron right now is its proposed $53 billion acquisition of Hess (HES +0.00%). From a strategic point of view, the deal looks good, but there's a major stumbling block. Hess and Exxon are partners in a large energy project in Guyana, and ExxonMobil believes it has the right to buy Hess out of the project if it sells itself to Chevron. That project is likely one of the main reasons why Chevron wants to buy Hess, so this could scuttle the Hess acquisition or, at the very least, make it a less desirable purchase.
Investors don't like uncertainty, and they are probably punishing Chevron's stock because of the doubts around what is a very large acquisition. But this might just be an opportunity for long-term investors to buy a well-run oil company when it appears relatively cheap. Chevron's dividend yield is roughly 4.2% compared to 3.3% for ExxonMobil. To be fair, ExxonMobil typically has a lower yield than Chevron when times are good in the oil patch, and the current spread between the two isn't out of line with historical norms.
NYSE: XOM
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However, the negative sentiment around the Hess deal is a major headwind for Chevron's shares and it will likely be resolved, in one way or another, over the next year. If the outcome of the fight over Hess is good for Chevron, the stock will likely rally. If the outcome is bad, that news is probably largely priced in already. Plus, Chevron can just find another acquisition target. With one of the strongest balance sheets in the industry, it has ample financial strength in that regard.
NYSE: HES
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The Hess issue isn't a compelling reason to give up nearly a full percentage point of yield to buy ExxonMobil. Or, if exposure to oil and natural gas is your goal, to buy Chevron's European peers with higher leverage levels and/or histories of dividend cuts in the face of adversity. Chevron's dividend has been increased annually for more than three decades, while BP and Shell both cut their dividends during the pandemic. The biggest reason to buy France's TotalEnergies (TTE +0.00%), meanwhile, is its diversification into non-carbon energy sources, a path that Chevron hasn't gone down to the same degree.
Oil is the dominant force, but...
To be truly objective, oil and natural gas prices are going to be what determines the outcome of the next year for Chevron. That also applies to all of its peers. But Chevron's relatively poor stock performance compared to its peers is another issue, and it's likely the result of investor concerns surrounding the Hess deal. The next year will be one of headline risk in that regard, but the next year will likely also bring a resolution to the issue. So given Wall Street is downbeat on Chevron now, it could be the right time to step in if you are a dividend investor looking to add exposure to an integrated energy major to your portfolio.
