Chevron Corporation (NYSE:CVX) has run into difficulties amid a negative energy sector backdrop, says Senior Portfolio Manager Todd Lowenstein. He says the energy space has been a challenged sector in the sense that oil prices have collapsed over 50% over the last year.
“Oil is now starting to reset and find a new equilibrium, trying to restore the supply and demand imbalance that still exists with excess inventories. Not only has excess supply been an issue, but also one of the big problems in the oil sector really has been on the demand side. Weak worldwide global growth has really hurt energy consumption with emerging markets slowing and developed markets unable to reaccelerate, so it’s a perfect storm of problems,” Lowenstein says.
Chevron has been no stranger to difficulties during this time, he adds.
“They embarked on a lot of expensive, big-ticket projects during higher price levels in oil, and they needed these higher price points to justify the investments…They got caught as oil prices fell with having not finished on these projects that were either delayed or went over budget.”
However, Lowenstein thinks Chevron (NYSE:CVX) will come onstream shortly, and that it is still a well-run company that could see upside optionality should oil prices rebound.
“Management is now reorienting the company to deal with the lower price environment, and you will see some rationalization of projects, noncore asset sales, and you will see some cost discipline in a lower price-deck climate. We think the dividend yield is attractive,” Lowenstein says.
“There is a pretty attractive risk/reward here as a contrarian play. The stock is discounting difficult times far into the future, and as they prepare to survive the current downturn, there is upside optionality for them to thrive if oil prices rebound, which should occur over time as the supply/demand equilibrium is restored.”
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