Chevron (NYSE: CVX) The shares have been at the back of the pack in terms of performance over the past year, with gains of just 2%. ExxonMobil (NYSE: XOM) has increased by 8% during that period, and Shell (NYSE: SHEL) is up about 17%. But don’t rule Chevron out when you’re looking at the energy sector. In fact, that underperformance could make it the most attractive integrated energy stock you can buy today.
What’s Chevron’s problem?
Probably the only word that should be on investors’ lips right now is ‘why’. Why is Chevron so far behind other integrated energy companies? A big part of the answer is that Chevron recently signed a purchase agreement Hess (NYSE: HES). But Hess is in a partnership with Exxon for a major capital investment in the oil sector. Exxon is trying to throw a spanner in the works for the Chevron takeover by saying it can buy Hess out of that partnership.
That would make the Chevron acquisition much less desirable and could even lead to the deal being canceled. Another problem here is that figuring out who is right could lead to material delays and require legal wrangling, which would be expensive. This uncertainty has left a cloud over Chevron’s stock, as investors generally don’t like uncertainty.
But that’s not all bad news, as it has given Chevron a fairly high dividend yield of 4.2% compared to its closest competitor Exxon, which yields just 3.4%. And while Exxon has raised its dividend for 42 years, it’s hard to complain about Chevron’s impressive streak of annual dividend increases, which has been going strong for 37 years. Simply put, they’re both solid dividend stocks.
Chevron is better prepared for setbacks
That said, while Exxon isn’t weak financially, Chevron is currently in a better financial position than any of its closest competitors. Notably, Exxon’s debt-to-equity ratio is about 0.2 times, while Chevron’s ratio is about 0.15 times. European colleagues make much more use of leverage. Chevron has the strongest balance sheet of any integrated energy company. Leverage is important because the energy sector is highly cyclical and sensitive to dramatic price fluctuations.
In short, when oil prices fall, companies like Chevron tend to take on additional debt to continue financing their businesses. In the case of Chevron and Exxon, that money is used to support the dividend. When oil prices improve, Chevron pays down the debt it has taken on, ensuring that the country is prepared for the next downturn in the industry. The chart below illustrates this quite clearly.
So if you buy Chevron today, you’ll own the most financially strong company in the energy sector. And it has a more attractive yield than its closest competitor, Exxon. But there’s another factor to consider, and that’s the Hess deal. Even if Chevron doesn’t end up buying Hess, the company is big enough and financially strong enough that it’s simply looking for another company to buy. In other words, the negative sentiment here is largely based on a short-term problem.
Don’t be afraid to buy this industry laggard
Ultimately, Chevron is a well-run energy company with rock-solid financials. Sure, there’s a very public downside to the stock right now, but that won’t last forever, and Chevron is more than capable of addressing it. For investors who want to own an energy stock and are thinking long-term, Chevron is probably the best place to buy at $1,000 (or more) today.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Chevron. The Motley Fool has a disclosure policy.
The Best Energy Stock to Invest $1,000 in Right Now was originally published by The Motley Fool
