Viper Energy to Expand in Permian: How Will the Stock Benefit?

Chevron Corporation’s CVX CEO Mike Wirth openly criticized the Biden administration's recent decisions related to the natural gas sector, particularly the halt on new liquefied natural gas (“LNG”) export licenses. Speaking at the GasTech conference in Houston, Wirth argued that this pause will lead to higher energy costs, disrupt supplies for U.S. allies and inadvertently increase emissions by delaying the shift from coal to natural gas.

Risks to Economic Prosperity From LNG Export Policy

Wirth contended that the Biden administration's approach undermines economic prosperity, energy security and environmental protection. He emphasized that natural gas, which often replaces more polluting coal in power generation, significantly reduces emissions. Data from McKinsey supports his claim, showing that the emissions avoided by switching from coal to gas surpass the reductions achieved through wind and solar power in the past 15 years. This highlights the critical role played by natural gas in cleaner energy generation.

Wirth also mentioned that natural gas is crucial not just for environmental reasons but also for the advancement of technologies like artificial intelligence (AI). He explained that while AI development typically takes place in innovation hubs such as Silicon Valley, the energy needed to power these advancements must come from reliable sources.

In this context, he highlighted the importance of natural gas, particularly from regions like the Permian Basin, which is known for its rich gas reserves. He argued that the benefits of natural gas are so evident that political considerations should not hinder its progress.

Industry Leaders Echo CVX’s Concerns

Other industry leaders joined Wirth in voicing their concerns at the conference. ConocoPhillips COP CEO Ryan Lance, representing the Houston-based oil and gas exploration and production company, condemned the LNG export pause as "irrational" and called for the United States to assert its leadership in the global LNG market.

Similarly, Lorenzo Simonelli, CEO of Baker Hughes BKR, an oil and gas equipment and services company also headquartered in Houston, criticized the current policy for lacking cohesion and sustainability. He emphasized on the need for a more integrated and forward-thinking approach to energy development.

Uncertainty of Ongoing Policy and Legal Challenges

In July, a federal judge lifted the moratorium on LNG export applications following legal challenges from several states, but the Department of Energy is currently appealing this decision. The ongoing policy uncertainty continues to provoke debate within the industry.

Overall, the debate over natural gas policy highlights the urgency for a balanced approach that promotes economic growth while addressing environmental concerns. Industry leaders, including CVX, emphasize the need for stable and forward-thinking policies to drive innovation and ensure energy security. As the situation changes, finding a middle ground will be essential for advancing a sustainable and competitive energy future.

Zacks Rank and Key Picks

Currently, CVX, COP and BKR each have a Zacks Rank of #3 (Hold).

Investors interested in the energy sector might look at better-ranked stocks like Core Laboratories Inc. CLB, carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Core Laboratories is valued at $821.45 million. The company currently pays a dividend of 4 cents per share, or 0.23%, on an annual basis. Netherlands-based CLB is an oilfield services company, operating in more than 50 countries. The firm deals with providing reservoir management and production enhancement services to oil and gas companies.

Zacks Investment Research

Energy major Chevron Corporation CVX emerged as August’s most shorted large-cap stock in the United States ahead of Tesla TSLA, according to Hazeltree’s Shortside Crowdedness Report.

Report: Shorting Chevron Stock Surges $200 million

The report, which compiles data from approximately 700 asset management funds globally, revealed that the total value of Chevron's stock used for shorting surged by more than $200 million last month.

Short selling occurs when a trader sells shares they don't own, hoping that the price will fall. They borrow shares to sell at a high price, then buy them back at a lower price to return to the lender, pocketing the difference as profit. If the price rises instead, they incur a loss. Short interest indicates how many shares have been sold short but not yet repurchased, reflecting the extent of short-selling activity.

CVX Plagued by Short-Term Vulnerability

The increased shorting of CVX stock can be taken as a signal that investors have become more bearish toward the company. It also reflects broader market sentiments, and for Chevron, it includes concerns over falling oil prices, the impact of excess natural gas supply and regulatory scrutiny over its proposed acquisition of Hess. Overall, short-sellers expect the share price of Chevron to fall in the near term.

As it is, shares of this integrated major slipped to a 52-week low of $135.37 last week. Over the past three months, CVX has lost more than 7% of its value, underperforming the S&P 500 and rival ExxonMobil XOM.

3-Month Stock Price Performance

Factors Dragging Down Chevron Stock

Commodity Price Weakness Reduces Profit Margins: Chevron’s profits are closely tied to commodity prices, and recent declines in oil and gas prices have squeezed margins. The absence of favorable pricing support in refined product sales contributed to the weak Q2 results. Should commodity prices continue to underperform or face volatility, Chevron's profit margins and earnings outlook will be negatively impacted, exacerbating the stock's susceptibility to market fluctuations.

Potential Acquisition Uncertainty with Hess: Chevron’s $53 billion acquisition of Hess poses risks related to regulatory approval and disputes with Exxon. The Federal Trade Commission is reviewing the deal, and Exxon has lodged a claim of preemption rights to Hess’ Guyana assets. This adds layers of uncertainty, which, if unresolved or delayed, could hinder Chevron’s growth plans and weigh on the stock, possibly deterring investor confidence in the near term.

Analysts Cutting Earnings Estimates for Chevron: Analysts across Wall Street have been revising down their earnings estimates for the company. Over the last week alone, two analysts have cut their current year estimates for Chevron. Another one has done the same for next year’s numbers. Their bearish actions have cut CVX’s current year Zacks Consensus Estimate from $11.86 to $11.57, while next year’s number is off from $14.69 to $14.45.

While a quick glance at Chevron’s short-term outlook looks weak on paper let’s see why investors may still want to stay invested at the moment.

Taking a Closer Look Reveals CVX’s Strengths

Strong Production Growth in the Permian Basin: Chevron's record-setting production in the Permian Basin is a critical driver of its long-term growth. In the second quarter of 2024, the company reported an 11% year-over-year increase in worldwide production, largely due to strong execution in the Permian and Denver-Julesburg basins. This impressive production boost, alongside the integration of PDC Energy, positions Chevron to capitalize on elevated oil prices, enhancing its profitability in future quarters.

Attractive Dividend Yield Above Historical Average: Chevron’s dividend yield stands at around 4.6%, well above its five-year average. This above-average yield, coupled with its robust dividend track record, underscores the stock’s appeal for income-focused investors. With consistent dividend payments and a history of increases, Chevron provides a stable income stream.

Significant Undervaluation Amid Price Corrections: Chevron’s current valuation metrics reveal that the stock is trading at a noticeable discount compared to its historical levels. The company's forward earnings multiple of 10.43 is around 13% below its five-year average. Based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization), too, CVX trades at a discount to its long-term median.

Conclusion: Hold Chevron Stock

Despite increased shorting, Chevron remains a quality business with a fairly impressive inventory of upstream development projects that will drive production growth in the long run. And if you are looking for a reliable high-yield oil stock, Chevron is still pretty attractive right now. However, the company’s high sensitivity to the oil price is clearly reflected in the current stock downturn. Estimates, too, do not look favorable for a higher share price. While this might not be the ideal time to invest in the “Big Oil” company, those who already own this Zacks Rank #3 (Hold) stock may stay invested.

Chevron currently carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks Investment Research