In 2006, Chevron (CVX)—the fourth-largest oil company in the world at the time—predicted “the era of easy oil is over…”
It was becoming harder to find new, economically feasible oil reserves… as oil demand continued to accelerate.
The company estimated that, while it took the world 125 years to use the first trillion barrels of oil… it would only take three decades to go through the next trillion.
In other words, the amount of oil remaining in the ground would decline… and the cost to extract it would rise sharply.
The price of oil was therefore set to rise, too.
Obviously, this would benefit Chevron and its fellow Big Oil companies.
But over the next few years, oil shortages didn’t appear. Rather, the opposite happened…
In the 2010s, we saw the “Shale Revolution” (the boom in fracking and horizontal drilling), which allowed drillers to tap previously unreachable resources.
That was great news for consumers over the next decade… as it started a long decline in oil prices.
On the other hand, the falling prices hurt the profitability of Big Oil companies like Chevron.
The bottom didn’t happen until 2020. When COVID hit, oil demand vanished and the price of oil plummeted—at one point, it even went negative.
In retrospect, that unprecedented event marked the bottom for the sector: Big Oil stocks quickly recovered their lost ground… doubling or more off their 2020 lows by the end of 2021.
That said, having lagged the market over the past decade, many sector leaders remain bargains. Most have strong balance sheets… and incredible cash flows now that oil prices are soaring.
Better yet, the entire industry, represented on the chart below by XLE, the popular energy ETF, has been a great place to hide from the selloff of 2022. While the market has declined by 14% year-to-date, XLE is up nearly 60%… and CVX is up more than 50% since January 1.
In February, we added Chevron to our Unlimited Income portfolio… and we’re already up more than 33%.
Today, I’ll tell you why I think this outperformance is set to continue.
A value-priced play with massive upside potential and a market-beating yield
Oil and gas prices have rallied sharply in 2022—a direct result of Russia’s invasion of Ukraine.
The price of oil rallied more than 70% in just a year… while the Henry Hub benchmark, which measures the price of natural gas in the U.S., has tripled since last May, to a level not seen since 2008.
Given the role Russia plays in the world energy markets… and the uniform call for sanctions to punish it for the brutal and unprovoked invasion of a sovereign country… energy prices—both oil and gas—will remain at these levels or climb even higher for the foreseeable future.
Meanwhile, Chevron expects annual average production growth of 3% through 2025.
You can see why CVX’s revenues—and profits—are set to rise. And it’s still cheap, with a price-to-earnings (P/E) ratio under 11.
But here’s the best part for income investors…
Oil supermajors are known for their dividends. These companies are cash flow machines, thanks to their productive assets and the world’s steady demand for fossil fuels.
But not every company in the group managed to maintain their dividends through the COVID disruptions.
Chevron didn’t just keep its dividends steady… It was one of the few oil companies to raise its payout to shareholders.
During the worst of the COVID pandemic, Chevron was conservative with its capital spending. As a result, it was able to hike its quarterly dividend twice—first by $0.10 in January 2020 and then again by another $0.05 in April 2021.
And this year, after another hike, it will pay $1.42 per share in quarterly dividends… which translates to a yield of 3.2%.
Over the past decade, Chevron has boosted its dividend by 75%. Not bad for a cyclical company whose main product was in a major downturn during much of that time.
But what happens if oil falls sharply from here? Will Chevron still be able to deliver safe and steady dividends?
In a word, yes.
For one thing, world economies are still recovering from the COVID shock… putting upward pressure on oil demand.
But even if this recovery doesn’t continue uninterrupted, CVX has shown it can maintain its dividends in the toughest environments… even when oil prices turn negative.
And oil demand isn’t about to fall off a cliff… even as the world pushes to lower its carbon footprint.
Far from it: According to the International Energy Agency (IEA), the world will need 8% more oil in five years than it needed last year… with oil demand growing from 96.5 million barrels per day (mb/d) in 2021 to 104.1 mb/d in 2026.
And even after that, the need for oil is here to stay.
Chevron is ready for the boom time… And it’s as safe as could be in the unlikely event of an oil price decline.
P.S. Next week in Unlimited Income, I’ll uncover another inflation-fighting stock that outyields the market.
Join us—risk-free—and get access to this stock as soon as it’s published… along with many more of my favorite high-yield, high-growth stocks for this environment.
