Geopolitical tensions have been elevated for the last couple of years. While the markets were still grappling with the continued standoff between Russia and Ukraine and the Israel-Hamas war, the specter of tensions in the Middle East has widened, with Israel striking Iran.
Typically, geopolitical tensions spell doom for markets – unless, of course, we're talking about defense companies, whose arms and ammunition power these wars. But when the theatre of conflict is the Middle East, energy prices are bound to react.
Oil prices (CLK24) did jolt higher on Friday after Israel responded to Iran's weekend strike in Israeli territory. Notably, oil prices had risen after Iran’s unprecedented strikes, also - but subsequently pared those gains amid expectations that Israel wouldn't retaliate. When that turned out not to be the case, oil prices reacted accordingly.
Amid simmering tensions in the Middle East, Chevron (CVX) looks like a good Warren Buffett stock to buy now. Notably, while Buffett was a net seller of stocks in Q4 – as he has been for five straight quarters – the Oracle of Omaha opened Berkshire Hathaway’s (BRK.B) coffers for Chevron, and scooped up another 16 million shares.
Why the Oil Price Forecast Looks Bullish
The fortunes of energy companies are closely tied to oil and gas prices. Put differently - if oil prices fall, there is not much that an energy company can do. Similarly, when oil and gas prices are on an uptrend, energy stocks across the board rally. The outlook for oil prices looks reasonably bullish for the following reasons.
1. Global growth has been holding up quite well: Contrary to expectations for a recession, global growth has held up relatively well, prompting the International Monetary Fund (IMF) to raise its 2024 global GDP growth outlook from 3.1% to 3.2%. Importantly, growth has been better than expected in the U.S., China, and India - which happen to be the top three oil-consuming countries.
2. EV adoption has been a lot slower: EV adoption has been a lot slower than expected, which means that global oil demand might not peak anytime soon.
3. Supply-side factors: The supply-side factors are somewhat mixed, as production cuts from the OPEC+ block have been more than offset by production from non-OPEC countries; namely, the U.S., Canada, and Guyana. In fact, according to the International Energy Agency, the market share of OPEC+ has slumped to all-time lows. Also, the agency estimates that if OPEC+ production is in line with targets, the bloc's spare capacity would be 6 million barrels per day (mb/d), which is the highest ever barring the COVID-19 period.
4. Rate cuts should help prop oil prices: Finally, expected rate cuts globally – even if they don’t happen to the extent markets believed a few months back – should help support oil prices.
I think that given the current backdrop, oil prices should be able to sustain or even increase from these levels over the course of the year.
Why Is Chevron a Good Warren Buffett Stock to Buy?
Given the positive outlook for oil prices, Chevron looks like a good Warren Buffett stock to buy now. Here’s why:
Rising production profile: Chevron expects its production to rise between 4%-7% in 2024, and sees it rising at a CAGR of 3% by 2027, excluding the impact from any asset sales over the period. In addition, Chevron is also working on renewables and building a hydrogen value chain.
Cost efficiencies: Chevron has been quite disciplined with controlling costs, and managed to limit the increase in unit production costs below inflation as well as many peers. Cost efficiencies are of utmost importance for commodity companies, as they don’t have much influence over pricing.
Capital discipline: Chevron has also been disciplined with capital management, and has managed to improve its return on capital employed (ROCE) much better than its peers. The company expects its ROCE to rise to 12% by 2027, and is targeting annual free cash flow growth of 10% over the next three years, assuming Brent at $60 per barrel.
Shareholder returns: Chevron has been using its free cash flows for shareholder payouts, including dividends and share repurchases. Last year, the company repurchased $15 billion worth of shares and raised the 2024 buyback guidance to a range between $10 billion-$20 billion. The company expects to repurchase between 3%-6% of its shares annually, which (everything else being equal) would suggest EPS growth of a similar magnitude.
Chevron has also been quite generous with dividends, and its current dividend yield of 4.1% is higher than many of its peers, including ExxonMobil (XOM) and Shell Plc (SHEL).
Finally, CVX trades at a next 12-month enterprise value-to-earnings before interest, tax, depreciation, and amortization (EV-to-EBITDA) of 5.72x, which seems reasonable considering the current outlook for oil prices.
CVX Stock Forecast
Wall Street analysts are also bullish on Chevron stock, and it has a consensus rating of “Strong Buy.” Chevron carries a mean target price of $180.70, which is almost 13% higher than yesterday’s closing prices.
Overall, a positive outlook for oil prices, coupled with Chevron’s rising production profile and cost efficiencies, make it an attractive Warren Buffett stock to buy now, especially for those craving a good dividend yield.
On the date of publication, Mohit Oberoi had a position in: BRK.B . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
