Chevron Corp (CVX) Valuation

The big bounce on Tuesday might have led you to believe that the downdraft in June was perhaps over, and that recession probabilities had eased. Actions of integrated oil company shares are contradicting that scenario, and may be indicating a recession. Chevron Corp (CVX) was as high as $182.40 on June 8, but is trading at b/a of 141.41/141.44 as I write this. What is it worth?

A Value Line report for CVX is available for free at the Value Line Dow 30 page. Using data from Value Line and a CFRA CVX report, it's evident that CVX, and likely the other oil majors, have had a rough time generating consistent revenue or profits in the last six or seven years. That leads to complications in estimating its earning potential. Future earnings are likely to be highly variable, not to mention political, so, instead of focusing on a single scenario, we look at several:

The first line assumes that oil prices stay at their current war-influenced prices for at least the next 10 years. The second line assumes that the war and its after effects end in 2022 or 2023, and that things are mostly back to "normal" by 2024. The third line uses the estimates published by CFRA for the current and next several years. The fourth line does the same but using Value Line actuals and estimates. The fifth line assumes that management has set the current dividend rate to 70% of their best estimate of long term average annual net income.

The duration (of earnings) reflect the volatile nature of oil company earnings, the already extant gradual decrease in average oil consumption, and the politics of climate change and electric vehicles. Discount rate is set at 5%. We could argue about the length of the decay portion of future cash flow and its rate of decline, but when you go out 15 to 20 years at a 5% discount rate, such changes won't be large.

The problem is that CVX was already selling well above full value in early June, and is still selling above its full value even now after a sharp decline.

If I had to guess, I would say that lines 2 and 5 are the right ones to use for a snap valuation of CVX. I would avoid buying CVX now, and sell it if I had it.