Chevron is another stock that has gone practically nowhere over the last year or so. There are a few factors at play. The first is uncertainty regarding Chevron's acquisition of Hess, whose crown jewel is its stake in the Stabroek drilling block off the shores of Guyana. The other partners in the Guyana joint venture -- ExxonMobil and CNOOC, a Chinese national oil company -- are looking to stymie the deal and keep Chevron out of Guyana.
The good news is that Chevron doesn't need the deal to go through to be a great investment. It can continue ramping up spending in its existing plays, namely the Permian Basin. It can also continue buying back its stock, which remains a good value with a 14.4 P/E ratio.
It's also important to know how the market can reward or overlook certain qualities at different times. Right now, sentiment is optimistic, and peers like ExxonMobil are rewarded for higher spending and bold acquisitions.
Many other companies have followed suit. Even ConocoPhillips, which is known for being a conservative capital allocator, announced it is acquiring Marathon Oil in a blockbuster $22.5 billion deal. With Chevron's major deal in limbo, there's just one more box left unchecked.
Chevron's financial health and prudence could also be getting overlooked right now. When oil prices are falling, investors often gravitate toward safe, stodgy, dividend-paying names like Chevron. And for good reason. Its financial health helped it acquire multiple companies at compelling valuations during the COVID-induced downturn when other producers were struggling to stay afloat.
For the last three years or so, oil prices have been remarkably stable and strong, which might convince some investors to gravitate toward riskier, more-leveraged plays. It could work out, but long-term investors know the best way to compound gains is to buy quality companies and hold them as long as the investment thesis remains intact.
In sum, Chevron has the qualities of an excellent long-term holding. Its greatest strength is its financial health, which is particularly important given the volatile nature of commodities like oil and gas. With its 4.2% dividend yield, the company stands out as a compelling choice for generating passive income regardless of oil prices.
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