Why Buffett Is All In On This Energy Stock

In recent months, Chevron has garnered attention for winning the confidence of Warren Buffett whose Berkshire Hathaway has taken a large stake. But Chevron’s roots trace all the way back to the 19th century when it was originally part of the Pacific Coast Oil Company.

Since then, Chevron has evolved to become one of the largest and most diversified energy companies in the world, and earned a strong vote of confidence from Warren Buffett.

That’s not entirely a surprise given that Chevron is one of the largest integrated energy companies in the world and involved in virtually every facet of the energy sector.

From oil and gas exploration to production and refining, as well as marketing, and chemical manufacturing, Chevron checks just about every box, which no doubt is part of the appeal for Buffett.

Key Points

• Chevron’s integrated global operations and strong balance sheet ensure stability and enable significant shareholder rewards.
• Competent management consistently delivers higher returns on capital, attracting substantial investment from Warren Buffett.
• The upside remains attractive even with a 4% dividend yield and a history of trending positively.

Why Buffett Loves Chevron?

Chevron’s vertical integration across the energy value chain, from upstream exploration and production to downstream refining and marketing, means it can better handle the volatility associated with oil prices.

It also allows Chevron to capture margins at various points in the value chain in order to stabilize earnings even during volatile markets.

The energy company is further diversified because it operates in over 180 countries and produces approximately 3 million barrels of oil equivalent per day. The energy company’s extensive network of refineries, pipelines, and service stations worldwide further highlight its reach and scale.

Chevron is Rock Solid Financially

With one of the strongest balance sheets in the industry, Chevron has the deep liquid reserves and low debt levels needed to thrive regardless of economic environement.

It also provides Chevron with the optionality to invest in high-return projects, weather economic downturns, and continue rewarding shareholders through dividends and share buybacks.

By way of example, Chevron has a debt-to-equity ratio of just 0.20x, less than half the industry average. The enormous free cash flow generation also supports a generous dividend yield above 4.1% that attracts income-focused investors.

When you put the various factors into the mix you end up with a wide economic moat, and a company that has both the scale and scope provide a competitive advantage.

It’s clear that management has shareholder-friendly policies too whether through buybacks or dividends. And they are clearly excellent capital allocators also given Chevron has consistently achieved higher returns on capital employed versus industry averages.

The Bottom Line

The integrated nature of Chevron’s business model translates to a steady stream of earnings and cash flows, even during periods of commodity price volatility and makes the investment opportunity especially appealing to long-term investors, like Buffett.

Chevron’s operating cash flow has averaged around $30 billion annually over the past five years, providing a reliable foundation for dividends and share buybacks.

Even today, Chevron has upside potential to $181 per share if the 22 analysts who cover the stock are to be relied upon. A 5-year discounted cash flow forecast analysis is even more optimistic and puts fair value at closer to $217 per share.