Should one Invest, Sell, or Maintain Position in Chevron Shares?

A few years ago, soaring oil prices due to Russia's invasion of Ukraine led to increased profits for oil companies. Compañías like Chevron (CVX 0.01%) used these profits to pay off debt and reward shareholders with generous dividends and substantial share buybacks.

However, the situation for oil companies has changed since the beginning of 2023. Chevron's performance has been disappointing, resulting in a 13% decrease in its stock value. Meanwhile, the S&P 500 has increased by 57% over the same period.

The slowing global demand negatively impacted oil prices. Additionally, the U.S. is producing record amounts of oil. Given these circumstances, investors are wondering whether they should buy, sell, or hold Chevron stock. Let's delve deeper to find out.

Reasons to buy or hold Chevron stock

Energy is essential to our economy, powering various sectors, including cutting-edge data centers, bustling factories, and vital transportation networks. Crude oil, which accounts for almost 38% of U.S. energy consumption, plays a significant role.

Chevron is a prominent player in the energy sector. Its primary focus is exploration and production, extracting crude oil and natural gas from rich regions like the Permian Basin using advanced recovery techniques. This upstream operation is just one of the components of Chevron's integrated business.

Once extracted, Chevron transforms raw resources into everyday necessities such as gasoline, diesel, jet fuel, and lubricants. It operates refineries in California and Mississippi and maintains a global presence through gas station transportation, marketing, and operations. These are its midstream and downstream operations, which help stabilize its volatile business.

Businesses that rely on commodities, like Chevron, are subject to unpredictable price fluctuations affecting their profits and margins. Chevron's integrated structure and balance between upstream, midstream, and downstream operations offer multiple revenue sources, helping it cope with oil and gas price changes. This integrated model is why Chevron has increased its dividend payout for 37 consecutive years.

During the past few years, Chevron has reduced its debt from $45.4 billion to $25.8 billion and carried out significant share repurchases. Its mediocre stock performance means it's currently trading at a low cost, with a price-to-earnings ratio of 15.6 and a price-to-sales ratio of 1.34, both below its 10-year average.

Chevron is currently offering investors a dividend yield of 4.6%, and its history of consistent dividend increases makes it appealing for investors focused on value-oriented stocks in an overvalued market.

Reasons to sell Chevron stock

Chevron continues to be vulnerable to prevailing market forces. After Russia's invasion of Ukraine in 2022, oil prices soared to $120 per barrel, but they have since dropped to approximately $71 per barrel.

Several factors contribute to the decline in oil prices. China's refinery output has fallen for six consecutive months, possibly due to an economic slowdown or the rising popularity of electric vehicles in the region.

Moreover, OPEC has revised its global oil demand forecast for the upcoming year, reducing its expectations to an increment of 1.4 million barrels per day (bpd), following sluggish markets in China and India. In contrast, non-OPEC countries like the U.S., Canada, and Brazil are significantly increasing production.

According to analysts at Wells Fargo, global oversupply could keep pressure on oil prices. The bank predicts that Brent Crude will average around $70 per barrel next year, which could impact oil companies' profit margins.

Should you buy, hold, or sell Chevron?

Oil prices may see continued pressure in the upcoming year, potentially because of a global economic slowdown. Although Chevron might benefit from high U.S. oil production, decreasing prices could squeeze its profit margins and reduce net income.

However, Chevron's stock is currently undervalued and offers a solid dividend yield. Despite its recent underperformance, the company has managed its balance sheet effectively and reduced debt. In light of its recent sell-off, Chevron could potentially be a good addition to a diversified portfolio today.

In the context of possible investment decisions, some investors might find Chevron appealing due to its low price-to-earnings ratio and price-to-sales ratio, both below their 10-year averages. Furthermore, the company offers a dividend yield of 4.6%, which could be attractive for value-oriented investors.

However, the global oil market is currently oversupplied, which could put pressure on oil prices and potentially squeeze Chevron's profit margins. Analysts at Wells Fargo predict that Brent Crude will average around $70 per barrel next year, which could impact the company's net income. This volatile market situation might cause uneasiness for investors looking to buy or hold Chevron stock.