This has been a tough year for the oil and gas sector, and crude oil prices (CLF25) are almost flat in 2024. Since the fortunes of energy companies are closely interlinked to oil and gas prices, they have also sagged in 2024, with Chevron (CVX) down 1% in the year to date.
Chevron is the second-largest integrated oil company in the U.S. after Exxon Mobil (XOM). It is also a top-five holding for Berkshire Hathaway (BRK.B), and while Warren Buffett has sold some shares, the conglomerate still holds a 6.6% stake in Chevron.
Bank of America Named Chevron a Top Idea for 2025
Recently, Bank of America added Chevron as a top pick for 2025. The company is a dividend aristocrat and has increased its dividend for 37 consecutive years, with its current yield at around 4.4%.
While there are names that have increased their dividends for even longer, Chevron is clearly committed to its dividend, as its earnings are not as stable as those of most other dividend aristocrats. Despite this, it has consistently raised its payouts. Incidentally, the last time Chevron cut its dividend was during the Great Depression. During the COVID-19 pandemic in 2020, while multiple energy companies, including BP (BP), cut their dividends, Chevron did not, even as it went on a cost-cutting spree elsewhere.
OPEC Lowered Its Oil Demand Growth Outlook
OPEC has now cut its 2024 demand growth outlook for five consecutive months, and in its report earlier this month, it lowered the forecast to 1.61 million barrels per day (bpd). The bloc’s forecasts are still rosier than the International Energy Agency (IEA), which too cut its 2024 demand growth outlook to 840,000 bpd.
Meanwhile, both OPEC and IEA expect oil demand to grow incrementally in 2025, and while the former is forecasting oil demand to rise by 1.45 million bpd, the latter raised its forecast to 1.1 million bpd amid improved demand in Asia, in part due to China’s economic stimulus.
In its report, the IEA talked about an “uneasy calm” in markets. It said that OPEC+’s decision to continue with its production cuts and delay the production ramp-up has “reduced the potential supply overhang that was set to emerge next year.” However, it added “persistent overproduction from some OPEC+ members, robust supply growth from non-OPEC+ countries and relatively modest global oil demand growth leaves the market looking comfortably supplied in 2025.”
What Will Trump’s Presidency Mean for Oil Markets?
Trump outlined his energy policy as "drill, baby, drill” in a recent interview. That’s a nice summation of the policies that the president-elect pursued in his first term, in which he pushed for higher oil and gas production to not only support the domestic demand, but also touted energy exports as a tool to cut the country’s burgeoning trade deficit.
While an increase in U.S. oil production would be bearish for markets, the OPEC+ bloc – especially its key leaders like Saudi Arabia and Russia – are likely to be more amenable to Trump’s call to “adjust” the group’s production. Trump might further clamp down on Iran and strictly enforce the sanctions on its oil exports. Overall, I remain somewhat constructive on oil prices heading into 2025 and don’t see much downside from these levels.
What Makes Chevron Stock a Good Buy?
Coming back to Chevron, the company has a strong balance sheet and had a net debt ratio of 12% in the third quarter. It has been quite efficient with capital allocation and has used excess cash to repurchase shares. The company is also working on structural cost cuts and expects to lower its cost base by between $2 billion and $3 billion by 2026.
This year, uncertainty over Chevron’s TCO project in Kazakhstan and the company’s impending acquisition of Hess (HES) have been an overhang on the shares. Meanwhile, Bank of America sees Chevron stock rising sharply higher if it can proceed with the Hess acquisition that is subject to an arbitration scheduled for Q2 2025.
The brokerage however does not see major downside in Chevron even if the Hess acquisition fails to get approval. Bank of America is also optimistic about the TCO project that’s set to commence operations in the first half of the next year. Between TCO, its Chevron Phillips Chemical project, and Gulf of Mexico projects, Bank of America sees Chevron adding $5.5 billion to its free cash flows over the next 2-3 years.
CVX Stock Forecast
Bank of America listed Chevron as a top pick for 2025 and raised its target price to $180 which is 20% higher than the Dec. 16 closing price. Analyst Jean Ann Salisbury’s target price is slightly higher than CVX’s mean target price of $175.41. Sell-side analysts share Salisbury’s optimism for Chevron and the energy giant has a consensus rating of “Strong Buy” from the 22 analysts covering the stock.
Chevron’s valuations also look reasonable: It trades at a next-12-month (NTM) enterprise value to earnings before interest, taxes, depreciation, and amortization (EV-to-EBITDA) multiple of 6.2x, which is similar to its average multiples over the last five years.
Overall, for someone looking for a high-yielding dividend aristocrat in the energy industry, Chevron looks like a good proposition, with the start of key projects and a possible Hess acquisition being the key drivers that can help the stock deliver decent capital gains in 2025.
