Legendary investor Warren Buffett is known for making outsized bets on companies once he becomes convinced of their growth prospects. Famously, Buffett owned zero shares of Apple (AAPL) before 2016. However, since then, the ace investor has not only purchased shares of the tech giant, but Apple has quickly become his company Berkshire Hathaway's (BRK.A) biggest holding. Currently, the iPhone maker accounts for roughly 45% of Berkshire's portfolio, with an eye-watering value of $164 billion.
It's been a similar story for oil major Chevron Corporation (CVX) and its journey to the upper echelons of Buffett's portfolio. Berkshire owned no shares in the company before late 2020, but Chevron now ranks among the portfolio's top five holdings.
The billionaire's interest in Chevron is particularly notable now that the energy sector is starting to look bullish. Goldman Sachs recently revised its oil demand forecast higher, and supply cuts by Saudi Arabia and Russia could provide an underpinning of support for oil prices in the near term.
So, is now an opportune time for investors to bulk up on shares of a leading energy company like Chevron, or are there more exciting opportunities in the oil space? Let's take a look at what CVX has to offer.
Buffett's Big Moves on Chevron
The Oracle of Omaha started building positions in Chevron stock in the fourth quarter of 2020. At the end of 2020, Buffett's Berkshire purchased 48.5 million shares of the company, representing a 2.5% stake. That initial stake was trimmed during the first half of 2021, but the buying spree resumed during the second half of that year, as Berkshire bought about 46 million more shares in the company for a cumulative total of about $15.1 billion.
The buying continued through the final innings of 2022, when Buffett started to trim his stake during the fourth quarter - coincident with a downturn in oil demand. The average closing price for CVX over this period was $174.51, compared to $80.96 when Buffett first started to build his position.
In the first quarter of 2023, Buffett sold more Chevron stock worth $6 billion, representing about 45% of its total stock sales of $13 billion in the first quarter. The sale took Berkshire’s position in the company to around 163 million shares (worth about $22 billion) from roughly 200 million shares at the start of the year.
The selling continued in the second quarter, as Buffett further reduced its stake in Chevron to less than $20 billion ($19.4 billion) at the end of the June quarter. There are currently 132 million Chevron shares worth over $21 billion in Berkshire's portfolio, accounting for 5.9% of its holdings.
Weak Financials
Buffett's CVX selling this year has coincided with a downturn in the share price. In 2023 so far, Chevron stock is down 10% to underperform the broader equity markets.
The company's second-quarter results were equally uninspiring. Chevron's revenues dipped by 29% from the previous year to $48.9 billion. Although EPS of $3.08 came in above the consensus estimate of $2.97, earnings were down by an even sharper 47.1% year-over-year. The company cited lower commodity prices, lower upstream realizations, and lower margins on refined product sales as reasons behind the downturn in both revenues and earnings.
Looking back, revenues have continued to slide from the third quarter of 2022, even though earnings have topped estimates on four occasions in the past five quarters.
Moreover, free cash flows also slid to $2.5 billion at the end of the June quarter, down from $10.6 billion in the previous year and $4.2 billion in the previous quarter. Additionally, although total debt eased in absolute terms to $21.5 billion, compared to $23.3 billion at the start of the year, the net debt ratio for Chevron worsened to 7% from 3.3% in the same period.
However, net oil-equivalent production grew by 2% from the previous year to 2,959 MBOED (MBOED stands for thousand barrels of oil equivalent per day). The company attributed the rise in production to the record output in the Permian Basin of 772,000 barrels of oil equivalent per day.
Recent Operational Highlights
In May, the company announced the $7.6 billion acquisition of shale producer PDC Energy, which is expected to boost its presence in the US. The company revealed that the acquisition will be free cash flow accretive and expects to increase its output from the DJ Basin by 260,000 barrels/day.
Additionally, Chevron's Gorgon Stage 2 development in Australia achieved its first natural gas production, allowing it to gain a stronger foothold in the Asia-Pacific region.
However, there were no other noteworthy operational developments announced with Chevron's latest quarterly results.
Is Chevron Fairly Priced?
Chevron looks reasonably priced at current levels when compared to its peers on some key valuation metrics, like price-to-earnings (p/e), price-to-sales (p/s), and price-to-cash flow (p/cf).
While CVX is trading at a forward p/e of 12.53, its peers like Shell (SHEL) (12.58) and Exxon Mobil (XOM) (12.05) are trading at comparable levels - although BP's (BP) forward p/e is much lower at 6.10.
When it comes to the p/s ratio, Chevron's is at 1.41, roughly in line with XOM at 1.21, but higher than both SHEL (0.59) and BP (0.49).
However, when it comes to the p/cf ratio, Chevron starts to look a little richer. Chevron is currently trading at a p/cf of 7.22, which is higher than SHEL (3.15), XOM (6.36) and BP (2.93).
Analyst Estimates
In terms of earnings growth, analysts are not too upbeat about Chevron. The consensus is calling for an EPS decline of 40.5%, 16.1%, and 30.2% for the current quarter, next quarter, and FY 23, respectively.
However, analysts are cautiously optimistic about Chevron stock as a whole, with an overall rating of “Moderate Buy” on the stock and a mean target price of $188.28 - indicating an upside potential of about 16.8% from current levels. Out of 18 analysts covering the stock, 8 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 8 have a “Hold” rating.
Final Takeaway
With operations in more than 180 countries, Chevron, founded in 1879, remains one of the largest players in the oil & gas field in the country. Chevron stock also offers an attractive dividend yield of 3.78% - a healthy payout that exceeds that of its rival Exxon, and may have helped to attract Buffett to the shares in the first place.
However, the consistent decline in revenue and profits over the recent quarters, coupled with the company's vulnerability to geopolitical developments and lack of any exciting operational developments in the latest quarter, makes me a skeptic on Chevron stock at current levels - just as Warren Buffett is lightening his stake.
In fact, the legendary investor is loading up on rival oil company Occidental Petroleum (OXY), which is now the No. 6 overall holding for Berkshire, right behind Chevron. This may indicate the ace investor is not looking to trim exposure to the oil and gas sector overall, but Chevron in particular.
Consequently, despite its fair valuations, healthy yield, and strong overall analyst ratings, I would suggest investors avoid loading up on Chevron stock at the current juncture.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
