Mike Wirth, the CEO of Chevron (CVX +0.26%), has been openly warning the world about the impact of the geopolitical conflict in the Middle East. Over the near term, it is important for investors to consider his concerns. Over the long term, investors looking at the energy sector might want to buy Chevron. Here’s what you need to know.
There’s no easy solution to the supply shortage
The ongoing conflict in the Middle East has disrupted the global energy market, limiting oil and natural gas supply. These are vital energy commodities, so a supply shortage leads to higher prices. That’s what most investors are focused on, but an insider like Wirth sees a lingering complication. Even after the conflict ends, it will take time for the energy market to get back to normal.
Image source: Getty Images.
That means that energy prices may not have peaked, with Wirth highlighting that reserve buffers used to offset short-term supply/demand imbalances are running out. The drawdown gets worse every day. Chevron produces three million barrels of oil a day, so it has a direct line of sight into the energy market. Investors should listen when an industry insider like Wirth warns about the risk of gasoline shortages in some markets.
Think long-term when you invest in the energy sector
Given that backdrop, a short-term way to play rising energy prices would be to buy a U.S.-based upstream energy producer like Devon Energy (DVN +0.39%). However, investors are emotionally driven, and once the conflict ends, oil prices could fall quickly. That would be bad news for Devon and any pure play energy producer.
Today’s Change
(0.26%) $0.49
Current Price
$191.50
Key Data Points
Market Cap
$381B
Day’s Range
$189.82 – $191.99
52wk Range
$135.21 – $214.71
Volume
220.7K
Avg Vol
12.1M
Gross Margin
15.15%
Dividend Yield
3.65%
However, Chevron’s business expands well beyond producing oil and natural gas. It also transports energy (the midstream) and processes it (the downstream). This diversification helps soften the energy sector’s frequent, often dramatic swings. Moreover, Chevron has one of the strongest balance sheets in the integrated energy peer group, with a debt-to-equity ratio of just 0.25x. That allows the energy giant to take on debt during industry downturns so it can continue to support its business and dividend until oil prices recover.
Chevron is a strong through-the-cycle energy option
The big-picture investment story here isn’t really high energy prices. It is that energy prices are volatile. While the current energy situation is likely to get worse before it gets better, according to Wirth, long-term investors should look at the full energy cycle. Indeed, given the world’s reliance on energy, you should have some exposure to the sector.
But trying to time the ups and downs in oil prices with a stock like Devon is probably not the best choice for most. A company built to survive the full cycle, like Chevron, is probably a better option. The proof of the company’s survival ability is its decades-long streak of annual dividend increases. When oil prices do eventually fall, you can focus on the reliable dividend checks you are collecting instead of energy and stock prices. And Chevron’s dividend yield is currently well above the market at 3.7%.
