Legitimate concerns about the oil staple have led to an overly bearish outlook and an opportunity for investors seeking a haven. By Teresa Rivas

When the going gets tough, the tough go big. There have been few places tougher to invest in during the current market chaos than energy, but Big Oil -- particularly Chevron -- deserves investor attention.

Chevron, like many of its peers, has been beaten down on worries about the tariff-induced trade war and a potential increase in production from OPEC hurting the price of oil. Yet the biggest energy companies are sitting on piles of cash and global portfolios that help mitigate risk. Chevron, specifically, has gotten too cheap -- trading at a 10% discount to its five-year average forward price/earnings multiple -- even as analysts expect earnings to bottom out in 2025 and rebound strongly over the next three years.

It also makes a nice place for investors to hide.

"Big Oil has held up better because they produce oil and gas , refine oil and gas, and they retail oil and gas," says Bill Smead, chairman and chief investment officer at Smead Capital Management, who follows energy markets but doesn't currently own Chevron. "They're downstream, midstream, and upstream types of companies. Therefore, they're more of an energy staple than pure producers. They're the widow and orphan stocks of energy." They also have enough money on hand to snap up struggling smaller companies on the cheap that could be accretive long term.

It's true that the energy trade, to some degree, will depend on the trajectory of oil prices, and those have been falling on concerns that a slowdown in the U.S. -- or the world -- as a result of tariffs will hurt demand just as the Organization of the Petroleum Exporting Countries plans to lift some production quotas.

Yet "energy stocks and oil have already priced in a recession," argues Roth Capital Partners Chief Economist Michael Darda. He remains a long-term bull, noting that the "energy sector is the only sector with double-digit upside to normalized earnings estimates," and investors who made the painful decision to buy the stocks in 2008 and 2020 cleaned up in the years following.

Chevron's earnings-per-share growth is expected to jump an average 15% a year over the next three years to $13.46, while its 5% dividend looks safe given a strong balance sheet. The company's operations around the world make it less vulnerable to upheaval in different regions, while in the U.S. it's now sustainably producing over one million barrels a day in the Permian Basin. And while it likely won't be big enough to move the needle near term, Chevron is moving to tap into new markets, including its announcement earlier this year that it is looking to help meet growing data-center energy demand.

Ben Cook, who serves as portfolio manager for two of Hennessy's energy funds, notes that even with oil down, Chevron's cash profile -- it's expected to throw off nearly $21 billion in free cash flow this year -- is very strong. "Even at $50 a barrel, we're still looking at a company capable of generating something on the order of 5% on a free cash basis to enterprise value. That should provide some comfort that even down to $50, you have an asset that's generating free cash....It's a name we'd be looking to add to in the current environment." West Texas Intermediate crude was recently trading at $64.31 a barrel, down 10% this year.

Cook likes that Chevron is finally getting to see some fruits from investments made in its upstream assets in recent years, like its TCO joint venture in Kazakhstan, and that its seasoned management team has been able to navigate through various economic cycles.

Of course, there are legitimate concerns about Chevron, even beyond potential trade war fallout and OPEC output hikes. The company is still planning to close its Hess acquisition later this year, although it still has to iron out some details related to Hess' partnership with Exxon Mobil in Guyana. Deteriorating relations between the U.S. and Venezuela have upended Chevron's projects in that energy-rich South American nation, after President Donald Trump said the company could no longer operate there amid his deportation push focused on Venezuelan migrants. Chevron's green-energy projects in the U.S. could also get back-burnered given the current administration's stance on climate change.

Nonetheless, with Chevron recently trading down to levels it hasn't touched since the last bear market, the outlook may have simply gotten too bearish.

Gerdes Energy Research's John Gerdes recently upgraded Chevron to Buy from Neutral and has a $167 price target, up 22% from Tuesday's close of $137.30. "Chevron's cash operating margin is approximately 20% above the industry median and...the company's capital intensity is about 15% below the industry median," he writes, noting that puts it in the top decile of energy producers in terms of returns through a full cycle. In a bullish scenario, the shares could trade above $200.

That may be unlikely in the near term. But the point remains that energy has gotten hammered so much harder than the broader market that fear has crowded out fundamentals, with a worst-case scenario already priced into the beaten-down stocks.

"When equities like Chevron reflect a lot of risk, that represents opportune times to get exposure," says Cook. "For us, it's a comfortable place to hang out while markets remain volatile."

We could all use a little comfort these days.

Write to Teresa Rivas at teresa.rivas@barrons.com

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April 25, 2025 21:30 ET (01:30 GMT)

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